Skewed circuit-breaker distorting prices

In the jargon of finance and security trade, circuit-breakers are pre-defined values in percentage terms that act as automatic checks when there is a runaway move in stock market index towards either direction. Two of the commonly employed steps taken while invoking circuit-breakers include halting of trade for a certain time, and halting the trade for the entire day. In the first instance, trading is halted for a few minutes to few hours in order to cool down the market participants, thereby allowing them to absorb any sudden news or development and take rational or measured approach with regard to stock prices. But if the volatility cannot be controlled even when trade is resumed after a temporary halt, then the second alternative is resorted to by suspending trade for the whole day.
The percentage levels (e.g. 5 percent or 10 percent in both directions) at which these circuit-breakers are deployed are usually revised regularly in line with the market trend. But critics point to the drawbacks of a circuit-breaker system by arguing that it prevents the reflection of true price of shares at least during the period it is imposed. Besides, it allows early investors like well-informed institutions to gain advantage by making a move even before its eventual clamping, thereby restricting the moves by other investors.
In the light of the above, the latest circuit-breaker rule invoked by Bangladesh Securities and Exchange Commission (BSEC) with effect from 19 March this year in the face of continuous downslide in stock prices has given rise to controversy due to its skewed or biased nature with regard to setting the lower and upper limits of circuit-breakers. The previous and largely discredited commission took this desperate measure in an attempt to arrest the rapid slump in share prices. The objective was to halt the steep fall in prices and stabilise the market in the wake of novel corona-virus outbreak.
This emergency circuit breaker rule of BSEC stipulated that the average closing price of any listed security over preceding five days would be set as its floor-price; the circuit-breaker would be automatically triggered when the stock price dipped below the five-day average. In contrast, the circuit-breaker for the upper limit was kept unchanged at the previous 10 percent level. The rule was clearly skewed in favour of upward movement of stock prices, as simple mathematics would show that the floor price could not decline from a certain level after a few trading sessions, and would continue to rise day by day thereby putting an upward pressure on the prices. But the rule limits the liquidity for trading and deters the efficient functioning of a stock market.
Although a new commission headed by a new chairman took over the BSEC administration in May, they have not yet taken any step to rescind or amend this highly controversial and skewed rule invoked by the previous commission. The impact of this biased circuit-breaker is now evident in the country's stock exchanges at both Dhaka (DSE) and Chattogram (CSE), which were re-launched on 31 May following suspension for around two months owing to the Covid-19 pandemic. The main index of DSE (DSEX) has already recorded a rise of 22 percent or 865 points, from 3,982 points on 5 July to 4846 points on 29 October in a matter of just 4 months. During this period, around 150 thousand new investors have joined the market and the average daily turnover has risen to about Taka 10 billion from a gradual fall earlier on. In fact, the daily turnover has shot up by 573.42 percent since 31 May.
As reported in the print media, the manipulators active in DSE and CSE are now taking advantage of this situation, where the stock market administrators are playing a supportive cum biased role in boosting share prices instead of running the show in an ethically sound, neutral and professional manner, so that stock prices could truly reflect their actual values. Some shares including those of a few closed or non-existent entities have recorded unusual price jumps in the process. The sudden jumps in the prices of insurance companies are also talk of the town now, despite having no rational basis for such a leap. Even the adviser to the prime minister complained during a recent dialogue that DSE is not doing anything despite incidents of manipulations by companies and brokers alike.
Insiders say, a lot of money has been pumped into the stock market in recent times and a large chunk of these have come from various business groups facing difficulties in the wake of Covid-19 pandemic. Besides, as the interest rates for deposits in banks have slid below 5 percent, some common people are also attracted to the stock market instead of going to banks. Insiders claim that the money that has entered the stock market in recent months is much higher compared to the amount that is coming out. The manipulators are simply taking advantage of this unique situation, as BSEC itself is apparently abetting the upward movement of share prices through imposition of a skewed circuit-breaker.
The rule itself has an uncanny resemblance to Pakistan's counter-productive ban on trading stocks below their opening prices in early 2009, which led to its expulsion from MSCI-EM (emerging markets) index and resulted in the inevitable price collapse after normal trading resumed months later. It took Pakistan another 8 years to regain that membership.
Under the circumstances, BSEC should immediately review the impact of this upward-biased circuit-breaker and reconsider its continuation even after the expiry of seven months. Moreover, any continuation of a circuit-breaker should be in the form of percentages for both upper and lower limits, not in the existing skewed form where the prices cannot go below the perennially rising floor prices. Otherwise, the commission is likely to be held responsible for any sudden collapse or downturn in the stock market once normalcy is restored.

Dr.Helal Uddin Ahmed is a retired Additional Secretary and former Editor of BangladeshQuarterly. [email protected]