Views on improving the integrity of global capital markets
27 December 2015

Portfolio Pumping in Singapore — What the Numbers Tell Us

I discuss what the words tell us in my blog post on our just-released Portfolio Pumping in Singapore: Myth or Reality? report, which covers 189 companies, spans 11 years, and analyzes 12 billion data points. By words, I mean the literature review process of the study. Now, in this blog post, I’ll explain what the numbers tell us and what our associated policy recommendations are.

We did not find evidence that portfolio pumping was prevalent on the Singapore Exchange (SGX) during the period of our study, January 2003 to December 2013, using the two-day inflation test. We can’t fully attribute this result to regulatory reforms. However, it can be inferred that the regulatory structure in place has been upholding market integrity where portfolio pumping is concerned. We also uncovered statistically significant evidence that demonstrated market participants did behave differently after certain milestone regulatory enforcement activities and a significant regulatory reform.

Among the milestone regulatory enforcement activities was the first indictment for portfolio pumping in Singapore during July 2006 involving a fund manager, as well as the subsequent guilty verdict in September 2010. The significant regulatory reform is the “introduction of composition system and mandatory minimum penalties by disciplinary committees for rule violations in the securities market,” proposed in February 2008 and passed in May 2011. It is also worth noting that the call auction system for determining end-of-day pricing was introduced in SGX in 2000. Since then, the system has been continuously refined. As the introduction occurred prior to our period of study, its impact on upholding market integrity where portfolio pumping is concerned could not be tested.

In segmental analysis, we did uncover statistically significant excess returns within the mid-cap stock segment during quarter ends, which were not seen in both the blue-chip and small-cap stock segments. Our view is that the blue-chip stocks were probably too liquid for undertaking portfolio pumping activities while the small-cap stocks were probably too small in terms of market capitalization to satisfy the investment mandate of most portfolio managers. Nevertheless, without statistically convincing price reversion within the mid-cap stock segment during the beginning of quarters, portfolio pumping once again failed to surface.

As we drilled further into the dataset, we discovered that significantly positive returns during quarter-end days also existed for the worst-performing quartile. During each quarter, stocks are dissected into four different quarters with the worst-performing quartile group marking the poorest-performing set of stocks in the quarter until the second last day. A plausible reason can be explained from a remuneration and reputational perspective. For example, for appraisal purposes, portfolio managers may be incentivized to pump up the prices of their worst-performing holdings during the quarter end. However, as consistent with the other findings, reversion of returns remained elusive.

Together with other, more specific hypothesis testing and linear regression, we didn’t uncover any significant evidence of portfolio pumping.

Based on our findings, we adopted two policy recommendations:

  • Due to the evidence we found — that prosecuting an SGX portfolio pumper and having in place regulatory reform that makes portfolio pumping activity a costly affair do have a strong, positive impact on market integrity — we recommend other bourses adopt and refine some of these measures to stifle potential market manipulation activities on closing prices during end of day.
  • Regulators should increase the awareness and education of mainstream media in relation to the real situation of portfolio pumping in practice so journalists can paint a more accurate picture of the current capital market regulatory scene for their readers.

By putting in place a vigilant surveillance and enforcement regulatory system to work hand-in-hand with mass media education efforts, upholding market integrity where portfolio pumping is concerned will continue to work as the evidence has shown.

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Image credit: Li

About the Author(s)
Alan Lok, CFA

Alan Lok, CFA, was a director of capital markets policy at CFA Institute. He was responsible for conducting research projects in the area of market instruments and market structures in the Asia-Pacific region. Mr. Lok worked with regulators, institutional investors, academics, and various other stakeholders within the financial industry to uphold investor protection and market integrity.

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