Not a stock exchange but a ‘shock’ exchange
Sri Lanka’s stock exchange lost a lot of money over the last week. Why?
Because of three different circulars by the market operator, Colombo Stock Exchange (CSE) – at least that is what most market players believe.
Let’s backup for a second. What did the circulars say?
The CSE has been obtaining stockbrokers’ debtor information on a monthly basis for ages. At the end of January that stance changed with the first circular when the CSE with the direction of the capital market regulator, the Securities and Exchange Commission (SEC) wished to get the same information on a weekly basis.
The CSE has sent this circular to stockbrokers, following up on the regulator’s direction adding information on companies with high turnover. This was a communiqué between the CSE and CEOs of stockbroker firms and was a confidential document. It was ‘shared’ on social media by one of the recipients which doesn’t say much about his/her responsibility towards the much wielded negative sentiments of the market. And the whole ‘thing’ happened after it went ‘on the cloud’.
A second circular was sent, damage-controlling the first because publicly sharing the first had pushed everybody into speaking about it, panicking and finally coming to conclusions. Apparently the CSE had issued the second circular to not harm the good name of the companies mentioned in the first circular. This caused players to accuse the CSE of bungling the circulars.
Then a third circular came to ‘further’ clarifying the second one.
Just to make a point clear – this is not the first time the CSE/SEC had called for information from the stockbrokers. However it is the first time that such information gathering was shared on social media, spilling on to mainstream media which is when everybody got to know about it.
A stockbroker who was clearly angry with the way things panned out said that the market does not have 100 per cent ‘knowledgeable’ investors. “There are over 12,000 new traders in the market doing more than 40,000 daily trades. Not all of them trade on fundamentals, value or sound judgement. Some of them trade on sentiment. There is a particular momentum in the market. When such circulars come, it is like a spoke in a running wheel,” he told the Business Times. Like him, many are angry.
On a different take, adding company names into that circular is not naming and shaming as many are now claiming/interpreting but the amount of credit given to clients, stock-wise by each broking firm. The mentioned shares are the most active in the market. “The entire stock market knows these are the most active shares in the market. It is not a red notice. Both the SEC and the CSE have every right to ask the information that they have mentioned in the circular. It’s a routine thing,” an industry source said.
Now this information which they have been giving on a monthly basis is to be given on a weekly basis. What is the big deal?
Interestingly the SEC released a media statement in early January welcoming market performance and mentioned in that they are strengthening ‘Surveillance and Supervision’. The market didn’t go down then, no one found fault with it or criticised it and the market reacted positively.
A somewhat of a departure from the angry stockbrokers came from one who asserted that as a regulator the SEC demands good behaviour and practices from the market which is why such circulars are issued from time to time. “It was purely an information gathering exercise to gauge the amount of credit in the market.” He added these circulars being brandished in the open initiated the issue. “It was a juvenile move by whoever publicised it.”
From experience, this writer knows that the capital market is a haven for conspiracy theories. In 2011 the theory was certain media colluding to bringing the market down because certain scribes were ‘jealous’ of some – especially high networth – investors for making money. Now the theory is that certain stocks were mentioned by the CSE, as they are hand in glove with certain high-profile stockbrokers who did not want these ‘non-traditional’ stocks increasing in price and rallied around on. They also pointed out that if the SEC did not mention names of stocks, why did the CSE take upon itself to send a circular with ‘names’?
Be that as it may, to reiterate, none of this would have happened if the circular wasn’t made public.
How many other CSE circulars to brokers come to light? So, in the same conspiracy theory suggestions, publicising circulars may be to sabotage the market momentum by – you got it – ‘vested’ interests. Or the stockbroker CEO / manager panicked, misunderstood or simply cannot read. Or all of the above!
Some investors and brokers have mentioned that the market went down since the SEC and the CSE have strengthened their surveillance activities. What’s wrong in that? Aren’t they doing their job?
How can anyone expect the SEC and the CSE to not have some level of increased surveillance when the market had Rs.1.8 billion daily turnover last year and now it has more than Rs. 10 billion turnover per day? Isn’t it good practice that they should strengthen surveillance?
This entire drama goes to show how ‘ vulnerable’ the Colombo stock market is.
Irrespective of who did this damage or why it was done, the fact remains that with the slightest bad news – in this case a supposedly negative circular by the CSE – the market was brought down by 7.5 per cent and billions of rupees wiped out in value. So the slightest shock to stocks will bring them down.
The stock brokers and investors should realise this for what it is. It is not a good sign.
To ‘clarify’ further, relying on ‘positivism’, be it a circular or a media article is dangerously embryonic and for the lack of a better word shameful for a market that set world records only two weeks ago. There aren’t ‘positive spins’ to negative stories. The negativity has to be tackled – at the root. These are basics.
“Clearly the CSE circulars were detrimental to the market’s momentum, but a mature market will not react as the CSE did to a circular. This is a lesson for all market players,” a market analyst said.
A third analyst agreed noting that investors work in a ‘herd’ mentality which shows their slow comprehension on market mechanics. “Otherwise a reaction of this magnitude to a mere circular isn’t warranted.” Those in the know told the Business Times that the CSE received phone calls demanding why ‘trading’ was restricted in the mentioned shares. Clearly they hadn’t ‘read’ the circular!
The lack of knowledge of the investors and their lack of prudence is what stockbrokers and investment advisors should work on – not opining on how CSE or the media calls for disseminating information.
| STBC discussion on the stock market | |
| The Sunday Times Business Club (STBC) is organising an online discussion titled “Recent developments in the Colombo stock market” on Wednesday February 17 at 7 pm. The panellists are Viraj Dayaratne, Chairman Securities and Exchange Commission and Dumith Fernando, Chairman, Colombo Stock Exchange.
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