I wish to make a few points about the recent Colombo Stock Exchange (CSE) events, which has gravely affected the CSE market and the whole economic image of the country which in turn has resulted in reduced investor confidence in the capital markets of Sri Lanka, grave inconvenience and direct financial losses to all investors at the CSE.
I believe the Securities & Exchange Commission (SEC) has acted in a highly unprofessional manner in the case of recent suspension of trading of the best performing stocks (DPL,TWOD, GREG, BLUE etc), purely on the basis, 'that these stocks have appreciated sharply (above 30%) over 4-5 days and traded more than 1000 times' which was the explanation given by the SEC. The suspension came like an explosion at a time when the market activity was at the highest peak.
Few points to note:
This move by the SEC is counterproductive when the CSE is picking up after the end of a long war. One must realize that, all stocks listed in the CSE should appreciate more and more after having suffered 30 years of war. Now that war on terror is over, the economic situation in the country is destined to improve. Under the circumstance, appreciating a stock by 30+% and more than 1000 times trading is a quite normal activity.
In fact, this has happened many times before in the history of the CSE. Therefore, the reasons given by the SEC in this trading halt (suspension) are far from the truth. If looked at the recent CSE events, the real problem is not what is shown to the general public. The SEC by way of a regulation changed the order ticker quote size from 25 cents to 10 cents. When this is done, it takes a maximum of 10 trade points for a stock to appreciate or depreciate by one rupee compared to earlier 4 trade points. If converted this to no. of orders across the boards, CSE and SEC and all broker firms are hit with up to 60% more trades on a real time basis
Due to misjudgment by the part of SEC, nobody was ready for this, and on the 4th August 2010 when the suspension came, the tickers and order books of the stocks were displaying buyers' (bids) at much higher prices than the sellers' prices (quotes) and the traded prices (trades) at nowhere near bids or quotes.
Technically, these happen when the trading servers (computers) are congested and no. of transactions is much higher than the current systems' capacities and is unable to do any real time trade order matching. It seems that to counter this effect, SEC came down with the trading halt of most active stocks giving the above reasons, which apparently solved the congestion problem, but making a bigger problem (stock market crashing) that we are facing today. This is evident when looking at the reason why the SEC has subsequently directed along with lifting the ban on 05th August 'to not to make any pre-orders or queue orders but to place only day orders'. SEC is trying all avenues to reduce order traffic at the cost of investors.
Under the circumstances, the best that the SEC should have done is, to be honest and to halt trading of all stocks of the CSE explaining the situation and may be reverted back to 25 cents ticker size until the technical and capacity problems are sorted out, and commenced trading with a time gap allowing the systems to recover from the congestion.
To make matters worse, on 05th August 2010, SEC lifted the trade suspension with no explanation as to any investigation carried out or on what grounds the suspension is lifted. Also re-introducing the circuit breaker systems at +/- 10% as of previous days traded price. (The Circuit Breaker Method was actually removed by the CSE some years ago to facilitate free stock market growth). This move too is counterproductive in terms of free demand and supply principle adopted by true "Open Market Model" and is disadvantageous to the country in terms of attracting large scale investors to the CSE. For example, if one is willing to invest 100,000 USD worth on a stock, there is no way to buy it under the imposed 10% threshold unless go much higher than 10% of the current trade price to match the quantities of such a large order. The common argument one could make for very high appreciation in price is to say it is "market manipulation". But this is often a misconception as every stock traded has both a buyer and a seller. In reality seller is realizing the monies or profits made of the stocks and the buyer is making a high risk investment anticipating future profit potential. Buyer's purchase decision may be based on the past trading behavior of the said stock or the companies' performance or anticipating business growth or any strategic changes in the business etc. But this no way can be termed as manipulation. This I believe is essential for any market growth to happen and speculation is the driving force behind any stock market growth anywhere in the world.
This promote higher liquidity rate of the stocks, which is a healthy factor for all stake holders such as GOSL, SEC, CES, Brokers firms, investors, banks and whole gamut of service providers up to the postal services of the country. If a buyer wants to make a high risk investment for any reason I see no reason why one must block him in doing so as 'all high profit investments are high risk investments too'.
Finally, I wish to mention that SEC should be studying and analyzing the market activity every day rather than like waking up from a long deep sleep and taking unprofessional actions of this nature leaving everybody in between to suffer at large. The GOSL, CSE, and SEC want more trades and more liquidity and more activity in the capital markets. I believe the current provisions under the 'corporate disclosure regulations' are more than enough to provide timely information to the investors to help in making purchase/sales decisions rather than tying up the market to various barriers. This country has had enough barriers, stops, and red-tapes all along the roads and everywhere we go and whatever we do, so 'NO MORE BARRIERS PLEASE, LET SRI LANKA GROW BEYOND LIMITS'.
The above points are expressed in the public interest to prevent huge financial losses and inconvenience at large to all stake holders of the CSE in future as an eye opener to relevant decision makers and authorities.
Anura Jayatilake MBCS, CITP, MSc(IT).
(The ideas and opinions expressed by the readers are solely of the author and do not represent the views of the LankaPage or ColomboPage. LankaPage.com, LLC. holds no responsibility for the suggestions or opinions sent by readers.)
source - www.colombo page.com
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