Market reaction to queries: Singapore’s experience is consistent with Hong Kong’s


Published September 09, 2014

Letter to the Editor from SGX in response to our commentary on queries in Singapore and Hong Kong

First published in Business Times on September 4, 2014

WE refer to the commentary, “Responses to queries: how market reacts” (BT, Aug 22), by Mak Yuen Teen, Ho Yew Kee and Eugene Kwek. We are heartened that the writers support Singapore Exchange’s proposal to establish the listings advisory and listings disciplinary committees to further strengthen our listings and enforcement regime. We would also like to take the opportunity to respond to the observations made in the commentary.

The writers studied market reactions following issuers’ responses to queries in Singapore and Hong Kong, and concluded that Hong Kong’s query system was more effective than Singapore’s. However, there are methodological issues with the writers’ study that need to be addressed before firm conclusions can be drawn.

To begin with, it is unclear from the commentary why the direction of price movements following responses to queries is necessarily reflective of the effectiveness of an exchange’s query system. The conclusion in the study appears to rest on two key assumptions: firstly, that if there is a reversal in the price direction following a response of no new explanation, this means that investors believed the issuer’s response; and secondly, that if the price moved in the same direction after an explanation is given, this means that the issuer’s response had useful information. These assumptions do not always hold.

The way prices move following a response from an issuer depends on many factors, including importantly the specific content of that response. For example, in a situation where there is a run-up in price before the query and the issuer’s response contains useful clarification that dampens any positive outlook for the issuer, the expected market reaction would be for the price to move in the opposite direction, instead of a continuation of the upward price trend as assumed in the study.

Similarly, if we consider the case where the issuer responds with no new explanation, it is conceivable, contrary to the assumption in the study, that the price direction will not reverse even if the market actually believes the truthfulness of the issuer’s response, since the price movement may be due to external factors, or investors may choose to maintain their outlook of the issuer’s performance notwithstanding the nil response from the issuer. In this regard, it is noteworthy that based on the writers’ own study, the Hong Kong market reacted to a response of no new explanation differently in the pre-query price run-up scenario as compared to the price run-down scenario, with no reversal in the price movements in the former scenario.

The conclusion reached by the writers does not appear to be borne out by the statistics they collated. The market reaction in Hong Kong is in fact generally consistent with Singapore’s in pre-query price run-up scenarios. Given that price increases account for 77 per cent and 80 per cent of the study’s sample size in Hong Kong and Singapore, respectively, the writers’ assessment that the Hong Kong query system is more effective than SGX’s is therefore debatable. SGX will reach out to the writers to see on how we can collaborate on future studies of the securities market.

Kelvin Koh,

Head of surveillance,

Singapore Exchange

 

 

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