Beyond Yasay, Almadro

It would be a serious mistake if we thought that the problems of the stock market would be solved by the departure of embattled Securities and Exchange Commission chairman Perfecto Yasay Jr. And however admirable (and, not incidentally, mediagenic) the recent actuations of Ruben Almadro might be, it is not at all clear that the resigned-reinstated-and-once-again- resigned head of the Philippine Stock Exchange's compliance and surveillance group would be able to achieve even a minor dent in that "old boys network" he wanted to do battle with.

The PSE's problems go much deeper than Yasay's perceived intransigence or the rebelliousness of Almadro. At that moment, the prevailing perception of the stock market is that it is a den of manipulators, insider traders and clubby brokers and dealers out to dupe the investor of his hard-earned money. If big investment companies, with their high-priced stock analysts, can be victimized, what chance does the little guys have?

To some extent, the bad rap the PSE is getting is undeserved. As a whole, the stock market is not a den of thieves and manipulators. There are securities laws in place which the SEC implements fairly strictly. The PSE has rules governing the conduct of member-brokers as well as their financial condition. Before the BW controversy, thousands of investors were comfortable participating in our capital markets. Foreign funds were coming in, although their presence came to be seen as a mixed blessing particularly when the Asian Financial Crisis of 1997 made it clear that those funds, i.e. hot money, were essentially short-term and, in terms of financial goals, promiscuous. They really weren't as interested in long-term investment in this country, as they were in quick gains.

But the dubious contribution Dante Tan and BW have made to our capital market is to expose the profound weaknesses of the system. It now appears that the legal infrastructure and regulatory framework are shot through with loopholes. If Almadro's report holds up, it will prove that a bunch of unscrupulous brokers who are members of the Exchange can conspire with a market manipulator to create an artificial and non-existent market in a particular stock, churn up spurious activity so that the price of the stock zooms to dizzying heights, then exit quickly when the ever-present suckers take the bait and buy at hugely inflated price levels. I know that Dante Tan claims he lost money when he too had to buy at those high prices, but the fact remains that huge profits were made by some people. And the basis for the profit was not the real value of the stock but, precisely, the manipulation of its price.

Sure, there are insider traders and stock manipulators in other market, including those in developed countries. But as a rule, they are eventually discovered, prosecuted and thrown in jail. Regulatory systems, in other words, are generally effective, at least to the point where participants in those markets come to accept that the rogues are the exception rather than the rule, but that the market in general can be expected to be fair and orderly. Caveat emptor may still be the prevailing rule, and profits are not guaranteed, but there is transparency, full and timely disclosure of material information, and corporate insiders are not allowed to profit from confidential, non-public information.

The case of Chairman Yasay complicates the problem because it has also put political color on all his acts. Thus, while his suspension of trading may have been ill-advised, one could also defend it as a reasonable judgment call based on legitimate concern about the lack of competent monitoring of market activities. The resignation of Almadro's group left a regulatory void which, arguably, was never adequately addressed by the exchange officers. His public quarrel with his fellow SEC commissioners on the issue of collegiality may be acoustically interesting, but it is basically a sideshow.

The most urgent item on the PSE's and SEC's agenda is to resolve the Dante Tan/BW controversy expeditiously. At the same time, it must act on several proposals for comprehensive reform, from reviewing net capital and margin trading rules to opening brokerage houses to public equity. These are details, but the central issue is confidence. Will the exchange ever be able to convince the public that it can be trusted with other people's money?

If not, we're facing an extinction scenario here for PSE. Nothing less!

Ricardo V. Puno's e-mail address: [email protected]