KUALA LUMPUR: The men who keep the Malaysian stock market ticking don’t wear pin-stripe suits. Some of them don’t even wear shoes.

"Tell Alan to close it at 1.24," a trader jabbers into a mobile phone as he pads around his mansion barefoot, clad in a tea-stained T-shirt and khaki pants.

In his study, seven men work the phones, shouting orders as rings of blue cigarette smoke curl slowly toward the ceiling.

They have bodyguards instead of secretaries and work from home. Outside, luxury sports cars squat in the porch and guard dogs strain at their chains.

Welcome to the world of Malaysia’s unofficial market makers, known as syndicates. They have been a mainstay for decades, providing liquidity in a market that is dominated by thinly traded, state-linked companies.

But a recent meltdown in some of the market’s hottest and smallest stocks has put the syndicates back in the spotlight, along with accusations that they dupe small investors.

Under one scenario, syndicates take an option to buy stock from a major shareholder at a discount to the market price. They then release rumours into the market and when retail investors pile in, both trader and major shareholder sell and make profits.

Other accusations are that syndicates use the market to launder money made in illegal numbers-forecasting and karaoke lounges, and that they pair up poorly researched firms with well-heeled investors.

Regulators say they are ready to crack the whip:

"Necessary action will be taken where there is evidence of attempts to interfere with the genuine forces of supply and demand," a Securities Commission spokesperson said in an e-mail to Reuters.

The trader in the tea-stained T-shirt, who declined to be named because of the increased scrutiny, said he provides a much-needed service, saying the market would fall fast asleep without people like him.

"I’m a trader, providing liquidity for the market," he said. "Malaysia is not Singapore or Hong Kong. Here, there is too little money chasing too many shares. We are needed."

Many brokers and fund managers and even the stock exchange say he has a point.

Malaysia’s $200bn market is dominated by stodgy, state-controlled companies and it has no official market-making model, a system used around the world to ensure that investors can always find a buyer or seller.

Without the unofficial market makers, retail investors - whose trades can comprise about a third of total trading volumes - would have little reason to trade the Malaysian market.

"It’s been a touchy issue for some time, but we have to realise the market cannot stand on its own based on institutional trades," said Kenny Yee, head of research at OSK Securities.

"Like it or not, we have to have retail participation. Most retail investors like a tad of speculation; fast-in, fast-out money."

But some foreign brokerages disagree. "A limited amount of speculation is OK. But when you buy and sell the same day and at both the bid and offer price, then something is wrong," said a dealer with a foreign brokerage.

On one of its heaviest trading days in May, turnover of Iris totalled $61mn - five times more than state-controlled utility Tenaga Nasional, which has a market value that is 165 times greater.

Foreign fund managers have also complained that there are not enough shares available in the big, government-linked issues to warrant their interest.

These include auto-maker Proton Holdings, shipper MISC, lender Malayan Banking and telephone company Telekom Malaysia.

Instead, these investors shift their attention to other Asian banks and cellular firms in Korea, Singapore and Taiwan, where there are more shares and more buyers and sellers.

Even the stock market, Bursa Malaysia, acknowledges it needs to be careful in stamping on speculators. As a regulator, it aims to ensure a free and fair market; as market operator, it needs to boost liquidity.

"Speculation is OK but our function is also investor protection. We have a statutory duty to ensure a fair and orderly market," said Devanesan Evanson, Bursa’s chief regulatory officer.

Last year, Malaysia’s government awarded stock-broking licences to foreign brokerages Credit Suisse First Boston, CLSA, Macquarie, JP Morgan and UBS to help strengthen its financial industry.

The move was aimed at strengthening the financial system by providing competition for local brokerages, led by CIMB, part of number two lending group Bumiputra-Commerce Holdings, and OSK Securities.

Still, some say the syndicates, while creating liquidity for retail investors, make the market even less palatable for foreign money.

"I think they should be put out of business," the foreign brokerage dealer said. - Reuters