Margin trading black list irks some brokerages

Among the stocks blacklisted for use as mortgaged assets in margin trading by Vietnam’s two stock exchanges last Tuesday is a roll call of top performing stocks.

Making it onto the list are Saigon Securities Inc. (SSI) and Kim Long Securities (KLS), both of which have frequently outperformed the market with millions of shares swapping hands each trading session.

Other blackballed shares include those of Bao Viet Securities (BVS), VnDirect Securities (VND), Vietnam Construction and Import-Export (VCG), all among the most active stocks on the Hanoi Stock Exchange. Local investors came out strongly against the banning of such liquid stocks, saying the criteria for the lists of disallowed shares would damage potentially profitable securities.

SSI and KLS, for instance, were among the few enterprises having as high as VND1.8 trillion ($87.8 million) in cash each at the end of this year’s second quarter. This is despite the two major brokerages suffering accumulative losses of around VND100 billion ($4.9 million) each by the end of second quarter.

“Using negative profit results to ban margin trading in those securities is too inflexible,” said Vo Van Minh, head of research  at Ocean Fund Management. He explained some financial institutions suffered losses because of the temporarily falling market prices of their portfolios and big provisions for those portfolios. But, that profits could rebound quickly when the market rose again.

“Unlike companies in the production sector, financial institutions need more evaluative criteria like solvency, [and] cash flows rather than just profit,” he said. Minh added it was still permissible to trade in the shares of several listed banks with strong profits, but exposed to huge risks because of their bad debts and weak liquidity.

Meanwhile, head of research at VnDirect Securities Nguyen Dinh Phong said the state management agency should look more at stocks’ liquidity, which is related closely to investors’ investing strategies and other market factors. “The criteria applied for the list are merely accounting figures and lack the other factors relating to the practical market,” said Phong.
While the securities watchdog has banned those high liquidly securities, a number of brokerages firms continue to dodge the law to provide their clients with margin trading services for those stocks, according to sources familiar with the matter.

The director of a securities company brokerage indicated his firm was wavering between providing margin trading on those blacklisted, but in-demand stocks or letting his clients shift to other brokerage firms.

“Investors don’t care if the services are official or unofficial, they only care if the service satisfies their demand,” said the deputy general director for another major brokerage firm. “Some securities companies might maintain simultaneously an official margin trading service regulated by the regulatory body and an unofficial one regulated by themselves.”

The SSC was forced to bring in margin trading and introduce lists of ineligible securities to iron out the unregulated practice. Local investors, meanwhile, are in the habit of cashing in strong fluctuating stocks including bad fundamental ones in the hope of earning some quick cash. They also borrow funds to invest in those stocks and expose themselves to huge risks in the process.