Transparency needed in trading by securities companies | Business

Proprietary trading is a practice followed in all stock markets around the world. Securities companies are allowed to set up trading desks and invest for themselves in order to make a profit. Since securities companies engage in both self-trading, investment advice to clients and brokerage, there is a risk of conflict of interest. However, this is only a question of ethics because the law only provides measures to limit such conflicts.

The Securities Law in Vietnam, as well as its related sub-laws such as Circular No. 121/2020/TT-BTC, also have clear regulations to limit risks to avoid conflicts. For example, a securities company’s trading account is a single account with its own code, and the trading order sent to the brokerage service may be the same as the client’s order. The brokerage department is responsible for processing client orders before trading orders. When a client places a limit order, the securities company must not buy or sell in the same direction. The same securities must be at a price equal to or higher than the client’s price before the client’s order is executed. If a client’s buy or sell order significantly affects the price of that type of security, securities firms are not permitted to pre-buy or sell the same type of security for themselves or to disclose information to third parties to buy and sell these securities. Securities firms must disclose to their clients when they are partners in contractual transactions with clients.

The regulations indicate that when drafting a law, the risk of conflict of interest has been taken into account. There are countless ways for proprietary trading to gain an edge in trading. During 2010 and before, when online trading technology was not yet developed and buy and sell orders were placed on paper or sent to floor brokers, the race before the order was more unfair. Currently, the speed of electronic transactions is very fast, so it makes no sense to race for orders. However, there are many other intangible benefits that make individual investors doubt the risk of self-trading for information.

For example, the daily margin balance in the first four months of 2022 is an extremely sensitive number. When the margin utilization level is higher, even reaching the threshold, it means that the purchasing power in the market has reached the maximum level and the risk of a market correction is high, when it no money left to buy. Although all securities companies only know their margin balance, if the stretched margin situation occurs in one company, it is very likely to occur in many other companies as well. Having the securities firm’s executives flagged on a continuing status will inevitably create an advantage for the proprietary trading department to react early. The entire margin lending service change initiative will also be known first within the company itself.

Securities firms, as professional investment organizations, can connect directly with companies to earn estimated profits sooner than any individual retail investor. The Securities Firm Analysis Department will also communicate the results of the business assessment to the senior executives of the securities firms prior to releasing this report to clients. Therefore, when increasing or decreasing the investment recommendation for a certain security, clients are often the last to know.

Transparency in self-negotiation

The psychological pressure resulting from recent investment losses has prompted many investors to demand the separation of self-trading activities from securities companies, or even the banning of self-trading activities. In fact, over the past twenty years, this problem has always cropped up with every stock market crash, and individual investors don’t know who to blame. During the 2010 period there were calls for the separation of this business and a leading securities company transferred its proprietary trading activities to an asset management company which was a wholly owned subsidiary. On the face of it, it’s an easy way to gain sympathy and there’s no conflict of interest, but it’s impossible to verify whether the information is leaked within the company itself.

Self-dealing activities of securities companies are an international practice permitted by law in many countries. This activity is also linked to many other roles of securities companies, such as market maker activities, so it is impossible to completely prohibit self-trading. Preventing conflicts of interest through the use of legal means can only erect fundamental barriers. It is the investors who must construct their own methods of verifying information. For example, any business analysis report prepared in a professional and ethical manner should clearly identify the person or group of people who did it and state whether they own shares in the company. A securities company’s financial statements clearly show its proprietary trading portfolio with an average cost, and investors can fully assess the risk of conflict of interest when discussing that company’s investment recommendations.

For regulators and exchanges, daily public disclosure of proprietary trading block trading information is a useful way to provide transparency for retail investors. However, this information has been discontinued since the beginning of March 2022. Close monitoring of loans also means that the overall market-wide spread size is tracked. This number can also be made public on a monthly or even weekly basis.

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