Bailing out the stock market
Saturday, 30 April 2011
Sayed J. Ahmad
Whether there is a Central Depository System (CDS) or not, the recent capital market crash proved that manipulation is always possible in this market. Last time when it happened in 1996, there was no CDBL - the CDS of Bangladesh, as a result there were no trace leading to any clues on how it happened and who were responsible. But this time, due to the existence of CDBL we have some clues, but yet no solid evidences to catch the culprits involved in the manipulations. Under the circumstance, the Securities and Exchange Commission (SEC) as the market regulator is getting the blame for not having enough monitoring mechanism in place, and not the greedy investors who took advantage of the loopholes in the system. When a mechanism is developed to play with the shares of the companies that have no control over the price of their shares once it enters into the secondary market, manipulation is bound to happen. Although it is expected that the general economic rule of thumb of "demand and supply" would play a role, but when a false demand is created by syndicates or groups to jack-up the price and then to let it fall after realization of some profits, the SEC could hardly do anything with this syndicated game other than breaking the syndicates and policing on them. Unfortunately, the SEC does not have any such mechanism or practice in place to tackle the situation where the players themselves are controlling the system at the stock exchanges as direct members. As such, the realization of demutualization of the exchanges has popped up. Demutualization maybe a part of the solution, but it is also true that the SEC is poorly staffed and ineffective due to not knowing their job well enough to take any action or develop any counter mechanism. To complicate the matter even worse, they are not above influences of the syndicates. Therefore, by implementation of demutualization at the exchanges, direct access of the bourse members to the confidential market information would be cut- off, empowering the independent management team to have more control over the system with reduced influence of the bourse members upon them. We are yet to see the complete version of the probe committee report which we believe would require further investigation from other angles. In the mean time, however, we need to do something to restore investor's faith in the market mechanism that has suffered a terrible blow. Despite constant reminders to the investors, advising them to invest using their personally investigated informed judgment using standard tools and techniques, the investors continued to invest on inside tips and rumors without understanding that they were actually walking into a trap. Both the Dhaka and Chittagong stock exchanges, including the SEC offer regular free investment training programmes for the investors, but few attend them and even if they do they do not care to use those mechanisms. As a result, they are remaining prone to exploits by the manipulators. Seeking easy money seems to be the only motive for all investors - old and new. Whenever there is a down trend in the market, investors go out in the streets and ransack properties within their bound. And surprisingly, the SEC reacts to this weird behavior of investors by doing "something" to the market as if it was really their fault or they really have any control over prices going up or down. Therefore, people are getting a wrong impression that the SEC does have control on the prices and they could do something. A market that has been turned into a medium of gambling should be allowed to face its own fate. The SEC's job is not to control the prices but to check and control illegal mechanism that is applied in the game for quick profits as it happened again recently. Without seeing the complete probe report and knowing all the details, it is really hard to say what has happened and how it happened and who is responsible. Different teams and committees have been formed to look into the matter and the recommendations also include reshuffling of the SEC itself. In the meantime, however, the Ministry of Finance could take some initiatives to restore investor's confidence and motivate them to return in the investing game again. The "Bangladesh Fund" has been arranged as a bail-out initiative to help the market recover from of the crisis. Some funds have been injected back into the market earlier but we did not see any favourable result. The market is still on a downward trend, clearly indicating that the investors are leaving the market by selling off their shareholdings. In this situation, there is just only one matter left for us to try, and that is allowing new shares to enter the market through new Initial Public Offerings or IPOs. Before the crash, we have been hearing about many different companies were coming into the market including some state-owned organizations. But after the crash, the momentum has died out. We think allowing some new companies that have been preparing or have prepared to come to the market should be allowed to come. The injection of some good and reputable company shares would drive interest among the investors to re-invest in the market re-igniting monetary flow in the capital market. In order for the entire mechanism to sustain, money must continue to flow. When the money flows, all the components related to the system makes money and sustains. We need to understand that this capital market is one of the many financial mechanisms that do not benefit the national Gross Domestic Product (GDP) or the Gross National Product (GNP); therefore, bailing out this market would not benefit our economy. Rather, it is better to let this market rise and fall on its own momentum. The SEC should draw some lines for themselves not to cross those lines that could jeopardize the self-sustaining system that the market has. The SEC should make it clear that it is the sole responsibility of the investor to understand the risks in this investment game and if they are careless then they have to bear the burden of their own decisions. And the SEC or the ministry of finance should not be held responsible for any of its outcomes - good or bad. The writer is an Associate Professor of Darul Ihsan University. He can be reached at email: ja0416@hotmail.com
Whether there is a Central Depository System (CDS) or not, the recent capital market crash proved that manipulation is always possible in this market. Last time when it happened in 1996, there was no CDBL - the CDS of Bangladesh, as a result there were no trace leading to any clues on how it happened and who were responsible. But this time, due to the existence of CDBL we have some clues, but yet no solid evidences to catch the culprits involved in the manipulations. Under the circumstance, the Securities and Exchange Commission (SEC) as the market regulator is getting the blame for not having enough monitoring mechanism in place, and not the greedy investors who took advantage of the loopholes in the system. When a mechanism is developed to play with the shares of the companies that have no control over the price of their shares once it enters into the secondary market, manipulation is bound to happen. Although it is expected that the general economic rule of thumb of "demand and supply" would play a role, but when a false demand is created by syndicates or groups to jack-up the price and then to let it fall after realization of some profits, the SEC could hardly do anything with this syndicated game other than breaking the syndicates and policing on them. Unfortunately, the SEC does not have any such mechanism or practice in place to tackle the situation where the players themselves are controlling the system at the stock exchanges as direct members. As such, the realization of demutualization of the exchanges has popped up. Demutualization maybe a part of the solution, but it is also true that the SEC is poorly staffed and ineffective due to not knowing their job well enough to take any action or develop any counter mechanism. To complicate the matter even worse, they are not above influences of the syndicates. Therefore, by implementation of demutualization at the exchanges, direct access of the bourse members to the confidential market information would be cut- off, empowering the independent management team to have more control over the system with reduced influence of the bourse members upon them. We are yet to see the complete version of the probe committee report which we believe would require further investigation from other angles. In the mean time, however, we need to do something to restore investor's faith in the market mechanism that has suffered a terrible blow. Despite constant reminders to the investors, advising them to invest using their personally investigated informed judgment using standard tools and techniques, the investors continued to invest on inside tips and rumors without understanding that they were actually walking into a trap. Both the Dhaka and Chittagong stock exchanges, including the SEC offer regular free investment training programmes for the investors, but few attend them and even if they do they do not care to use those mechanisms. As a result, they are remaining prone to exploits by the manipulators. Seeking easy money seems to be the only motive for all investors - old and new. Whenever there is a down trend in the market, investors go out in the streets and ransack properties within their bound. And surprisingly, the SEC reacts to this weird behavior of investors by doing "something" to the market as if it was really their fault or they really have any control over prices going up or down. Therefore, people are getting a wrong impression that the SEC does have control on the prices and they could do something. A market that has been turned into a medium of gambling should be allowed to face its own fate. The SEC's job is not to control the prices but to check and control illegal mechanism that is applied in the game for quick profits as it happened again recently. Without seeing the complete probe report and knowing all the details, it is really hard to say what has happened and how it happened and who is responsible. Different teams and committees have been formed to look into the matter and the recommendations also include reshuffling of the SEC itself. In the meantime, however, the Ministry of Finance could take some initiatives to restore investor's confidence and motivate them to return in the investing game again. The "Bangladesh Fund" has been arranged as a bail-out initiative to help the market recover from of the crisis. Some funds have been injected back into the market earlier but we did not see any favourable result. The market is still on a downward trend, clearly indicating that the investors are leaving the market by selling off their shareholdings. In this situation, there is just only one matter left for us to try, and that is allowing new shares to enter the market through new Initial Public Offerings or IPOs. Before the crash, we have been hearing about many different companies were coming into the market including some state-owned organizations. But after the crash, the momentum has died out. We think allowing some new companies that have been preparing or have prepared to come to the market should be allowed to come. The injection of some good and reputable company shares would drive interest among the investors to re-invest in the market re-igniting monetary flow in the capital market. In order for the entire mechanism to sustain, money must continue to flow. When the money flows, all the components related to the system makes money and sustains. We need to understand that this capital market is one of the many financial mechanisms that do not benefit the national Gross Domestic Product (GDP) or the Gross National Product (GNP); therefore, bailing out this market would not benefit our economy. Rather, it is better to let this market rise and fall on its own momentum. The SEC should draw some lines for themselves not to cross those lines that could jeopardize the self-sustaining system that the market has. The SEC should make it clear that it is the sole responsibility of the investor to understand the risks in this investment game and if they are careless then they have to bear the burden of their own decisions. And the SEC or the ministry of finance should not be held responsible for any of its outcomes - good or bad. The writer is an Associate Professor of Darul Ihsan University. He can be reached at email: ja0416@hotmail.com