Panic selling at CSE

The Colombo Stock Exchange’s (CSE) strict direction to all stock brokers that any outstanding amount on clients accounts are disallowed by June 1, has been the main reason for the stock market to crash in recent weeks, stock market analysts said.

“The CSE has said that none of the client accounts can be in an overdrawn status by June unless it is a margin trading account. All the brokerages overtraded on clients’ accounts and bought more than what the clients’ could afford to pay,” a stock market analyst said.

“For example, when an investor invests in Rs. 100,000 worth of shares, but wants Rs.200,000 worth of shares, the stockbrokers extend Rs.100,000 more credit to the investor,” he explained further saying that the CSE has disallowed such transactions from June onwards. As such brokers are ‘clearing’ accounts to comply with the regulations.

He explained that the settlement cycle of an account is ‘trading plus three days’ (T + 3), where the stockbroker has to settle the transaction – that is obtain the money from the investor within three days for the stock that he bought. “But what the stock brokers usually do is wait beyond three days for the price of the particular stock to rise and make a profit when he sells it. The new regulations of the CSE say that this is clearly a breach of contract,” he said.