Sri Lanka's share market regulators this week revealed that they’ve rustled up a new recipe to curb stock market volatility, but they won’t divulge the mechanics of this formula, amidst much stockbroker displeasure saying it’s (too much) at their discretion.
“This new directive, replacing the old 10% price band (price curb) will hurt the Securities and Exchange Commission’s (SEC) credibility. Just when the market was getting used to the 10% price curb which was imposed on August 5, they come up with a new one,” a broker said.
The SEC, after discussions with the Stock Brokers Association of Sri Lanka (SBASL) and after studying the market for about one month came up with the new approach where volatile shares which fall within this formula will be tracked for five market days and will be imposed a 10% price curb for 15 market days.
However the way they arrived at this formula, SEC says will not be disclosed.
The SEC refutes all allegations saying that they imposed a 10% price curb to halt the volatility in the Colombo bourse amidst heavy criticism by certain industry players more than a month ago and this too will be a similar scenario.
“When we initially imposed the 10% price band last month it was the same situation-we faced many criticisms (now too there will be similar criticisms). This formula is to be tested and if there’re issues we will address them,” Indrani Sugathadasa, Chairperson SEC told the Business Times.
“It’s too technical to discuss,” Mr. Cader said, adding that the formula captures the volatile shares and their traded volume adjusted to the public holding. He said that the top bracket of highly volatile shares will get captured and this method was put together to arrest the instability of certain stocks.
But some players say that one of the theoretical requirements for a free and efficient market is transparency. “If not addressed properly it could lead to confusion,” Milinda Ratnayaka, Research Analyst SMB Securities said.
Another SEC official noted that Sri Lankans (traders and brokers alike) are 'smart’ and if there were manipulations within the 10% curb as was seen during the past month, then they’ll try to manipulate this new rule as well. Mr. Ratnayake said that price bands haven’t been disregarded by the market as was the popular thinking till recently but market players have found ways to tweak the system and explore opportunities within the legal limits.
However, not many in the share brokering industry welcomed this move by the securities regulator.
“The secret formula lacks a boundary or a definition,” another analyst noted, adding that not just the broker community, but anyone needs clear boundaries drawn on what to do and what not to do.
“The introduction of a ‘secret formula’ to catch ‘naughty’ stocks is undoubtedly controversial. Anybody accused of being ‘naughty’ has the basic fundamental right to know the definition of this ‘naughty’ classification and how a particular thing or act was determined as being ‘naughty’,” an agitated broker said.
He added that the new rules that replace the price bands are going to be even more objectionable than the hated price bands.
The SEC official said that the parameters on such volatile securities are detected are not made public (in any country. “That’s the standard.”
Mr. Cader noted that this latest directive won’t be ‘panacea’ for all ills, but will move the market towards a more stable position.