Sunday, September 26, 2010

SEC's 'goni billa' formula still un-decoded

The new price curb formula imposed by the Securities and Exchange Commission (SEC) on Monday hasn't seen much reaction by share market participants which is mainly attributed to their lack of knowledge on this as the regulators aren't revealing the formula, analysts say.

"The market didn't see much of a reaction overall to the formula during the last five days," Deshan Pushparajah Manager Corporate Affairs, Capital Alliance Holdings Ltd said. Analysts said that this is because the traders and the stockbrokers haven't still cracked it.

Two stocks - Vallibal Finance (VFIN) and Lake House Printers and Publishers (LPRT) were imposed the price curb this week by the Colombo Stock Exchange (CSE). Mr. Pushparajah said that VFIN saw a marked fall in price due to the imposition of the band, with the price crashing by the maximum 10%. "This is because I believe it was truly manipulated and is now trading at much higher than the actual value. So the imposition helped to some extent," he said, adding that one will see the same type of negative reaction by the market on the shares the SEC imposes trading bans on.

An analyst agreed saying that the market didn't care less about the price curbs this week.
Some say that although the concept of imposing price restrictions only on highly manipulated shares are good, the way in which the formula itself is hidden by the regulators is very unhealthy and affects the transparency of it all.

"This won't impact the market now (as the shares subjected to this are currently only fairly illiquid ones), but it will, the day a share considered a 'blue chip' moves up considerably due to some price sensitive information and bands are imposed on it. Then serious market players will get involved in the voice against the secretive nature of this rule," another analyst said. VFIN declined by the maximum of 10% for the day with investors requiring 50% of the settlement value upfront if they wish to purchase the share.

Goni billa
Analyst who call it the infamous price band, said that it continues to haunt the market as the CSE surprisingly targeted LPRT for applying the undisclosed 'goni billa' formula.

"The stock rose only by 0.06% yesterday and was about to retrace. Now thanks to the price band it will remain supported at the current level falling only by a maximum of 10%," the second analyst said.

However, they said that despite outside interference the market remains bullish and buoyant as ever. "People have come to terms with the obnoxious price bands and realized that it is only a nuisance and not a real barrier to any share from going up. When Sri Lanka is looking forward to make itself the financial hub of Asia, such type of naive rules will only delay our progress towards this goal," the second analyst added.

He noted that 'Laissez faire' (leaving the markets free from state or any other interference) is a cornerstone principle of free market economics. "The more you interfere the more distorted the markets will be.

No prudent investor would want to come and invest in a distorted and warped market. Markets are always right. Leave the market free from outside interference and it is capable of self regulating and coming to a stable equilibrium state," he added.

source - www.sundaytimes.lk

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