Analysts are to adopt a ‘wait and watch’ approach pertaining to two impending regulations to be laid out by the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission (SEC) whilst new Automated Trading Rules, introduced last week was considered still early for feedback. Both institutions had recently come out with new instructions and regulations pertaining to the improvement of the stock market and also to strengthen the stock brokering firms.
The SEC had stated that it is looking at formulating a regulatory framework that would allow short selling in equity markets while also instructing brokering firms to install telephone recording equipment. In addition, the CSE recently amended the Rule 8.1 of the Automated Trading Rules (ATS) relating to the methodology of computing the Closing Price of Securities traded on the ATS (except debt securities). The Amendment came into effect from June 17.
On the CSE Amendment, analysts stated that it would ensure less market volatility as the closing price will be determined based on a minimum volume of 100 shares. In addition, according to the amendment, the ASPI heavyweights can’t be bought and sold as easily to affect ASPI or individual stock performance. However, they stated that they would have to wait and watch on the extent to which it would have an impact.
Meanwhile, they stated that adopting short selling methodology was not a feasible move at this juncture. Accordingly, a short selling involves the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is generally motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit when the market is falling.
Analysts, however, stated that the move was not feasible this juncture owing to the nature of the market.
Speaking to The Nation Gain, Chief Strategist, Capital Alliance Partners Limited, Purasisi Jinadasa said that the move was highly impractical in the near future due to the illiquid nature of the market. “We should have a high market capitalization. Even the company which has the highest daily turnover cannot adopt this at the current juncture,” he said.
Head of Research at NDB Stock Brokers, Waruna Singappuli, while stating that short selling would make the market efficient, added that it could also result in the market becoming volatile. He added that since the risk of loss on a short sale is theoretically infinite, the methodology should only be used by mature markets who could afford to take up such risks.
“This system allows one to make money when the market is going down. While it is a good thing on one hand, on the other hand, if we do not have a strong market, it would make it even more volatile,” Singappuli added. Deputy Director General, SEC, Dhammika Perera stated that the SEC was currently looking at the possibility of formulating the framework but added that that it would not be done overnight since they would have to consider practicality of the system and also draft regulations that would go along with it.
Further the SEC also stated that it had also instructed all stock brokering firms to install recording devices on their phones in order to record conversations with their clients pertaining to deals.
While analysts had given mixed responses to the call, Perera pointed out that even though it was not mandatory for firms to record their conversations with clients, it will eventually be made compulsory once the system and the finances are finalized. “We have to do this because, as a regulator, we need to have some sort of evidence in the event of problems,” he said.
Singappuli stated that such a move was impractical since there were too many stock brokering companies. “We have 29 stock brokering firms in a market that has only 200-300 companies. In addition, our market is also slow. Therefore, I do not think it is feasible for all the companies to go for this system at the moment,” he said.
Meanwhile, President, Colombo Stock Brokers Association (CSBA), Dihan Dedigama stated that the onus was on the firms to implement the system.