The Chittagong Stock Exchange (CSE) has proposed reintroducing intraday same scrip netting to boost liquidity flow in the market through increased transactions.
In a proposal submitted last month to the Bangladesh Securities and Exchange Commission (BSEC), it said it was expecting the daily turnover of the CSE to rise up to 12 times if netting was put in place.
Scrip netting will allow investors to take positions in a security throughout a trading session without waiting for the maturity of shares purchased. Traders/participants will have to settle their net positions at the end of the day with the broker, and then the broker will make the settlement with the exchange.
The CSE had insisted on implementing the netting system several times, but this time it made the move against the backdrop of a steep fall in daily turnover due to the imposition of the floor price.
The bourse has recorded turnover even lower than the Dhaka Stock Exchange. For example, the DSE posted a turnover volume of Tk 7.34 billion on Monday whereas turnover of the CSE was a mere Tk 81.12 million on the same day.
As transactions have not been picking up, many brokers of the CSE find their operations unviable.
Scrip netting can change the scenario as it will increase the number of orders, leading to a surge in the supply of shares.
One of the major advantages that investors will get is the opportunity to offset loss in one position with gains in another within a single trading day.
Let's consider a situation where an investor buys 200 shares of X company at Tk 100 each and then sells 100 shares of the same company at Tk 105 per share.
He again buys another 100 shares of the company at Tk 110 each and sells 200 shares at Tk 115 per share on the same day.
The total buy amount stands at Tk 31,000 while the sell amount at Tk 33,500.
Net position in terms of shares is zero but the investor will have Tk 2,500 in net cash position. The broker will have to settle only the net position worth Tk 2,500 instead of settling each trade separately, which would reduce transaction cost and settlement obligations.
Netting will drive up both demand and supply of shares, which will in turn narrow the difference between biding and asking prices. "This is because the shares are not locked in for any period, and investors feel comfortable placing orders and trading frequently with smaller profit margins," reads the proposal.
"The scope of abnormal price hike will shrink due to increased supply of shares," said CSE acting managing director Md. Ghulam Faruque.
Meanwhile, the securities regulator has formed a body to examine the proposal.
Mohammad Monirul Haque, CSE deputy general manager, said the bourse had held several meetings with the securities regulator, and the regulator demanded supporting documents relating to infrastructure capacity and settlement efficiency.
In its proposal, the CSE suggested the scrip netting be applicable for A, B, G and N category securities. But initially the commission may give its approval for A and B category securities.
The managing director of Midway Securities, Md. Ashequr Rahman said the scrip netting system that had been introduced in many countries had both positive and negative outcomes.
"Initially, the system may trigger price volatility but eventually would play a positive role," he said, given the exchange's active role and regulatory vigilance.
Earlier in 1998, the securities regulator allowed the port city bourse to implement scrip netting. Later, the regulator suspended scrip netting in 2003 in absence of a risk management system. Back then, it was difficult to contain false transactions due to duplicate paper shares.
A risk management system was introduced in 2010.
The CSE has already conducted mock tests of scrip netting, said Mr Monirul Haque, but before allowing scrip netting the bourse will have to bring some changes to their back office software.
In case of any default on delivery of securities and money, the CSE will settle claims in line with the provision for settlement and transaction regulations.
If a stock broker fails to deliver securities, the exchange will suspend the broker. The following day, the exchange will purchase the required amount of securities within the auction period and transfer those to the buyer's account within the stipulated trading cycle.
If a broker fails to return the sale proceeds, the exchange will bring back the securities and sell those to make payment to the seller within the stipulated trading cycle.
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