Sunday, September 18, 2011

SEC mulls removing price bands, reinstating circuit breakers

The Securities and Exchange Commission (SEC), more than a year after imposing the controversial price bands, is exploring the possibility of removing it and reintroducing circuit breakers, sources close to the SEC said.

“The whole context in which shares trade (now) has changed with stockbrokers being prohibited to grant credit to investors, margin lending facility coming in, etc. So the SEC has pondered some changes to the price band which are being considered, but nothing has been finalized,” one source told the Business Times.

The 10% price curb was imposed by the regulators on August 5 last year, disallowing shares to go up or down by more than 10% in price amidst opposition by many traders. “When a share appreciates there needs to be sufficient cause (for it to do so),” he said, adding that attributing sheer (high) investor sentiment to a ‘crazy’ rise in fundamentally weak stocks reflects negatively on the market.

Market wide index- based circuit breakers (which were in effect some time ago) are imposed by stock exchanges to halt trading of equity securities in order to provide a ‘cooling off’ period when there is an unusual movement in the index. The SEC is considering this," the source added.

Analysts say that while the concept of imposing price limits only on highly manipulated shares are good, the way in which the formula itself is hidden by the regulators is very unhealthy and not transparent. One analyst said that the unilateral imposition of price bands was not necessarily in the best interest of the market since it penalised all companies irrespective of whether there were genuine reason for significant price changes or not. “A more targeted approach has greater merit although it will be a challenge in defining suitable criteria,” he added, saying that circuit breakers will be an answer.

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