Share index breaker deployed

Posted by BankInfo on Thu, Jan 20 2011 04:54 am

Stock market tumbled one more time yesterday that counts fifth straight crash in a row. It's been very thwarting for the regulator's efforts of containing volatility and repealing the hope for a calm and confident market. The latest move -- the introduction of circuit-breaker, which halts the market if the index gains or loses more than 225 points -- also turned futile. Trading began two hours late and the plunging stocks halted it within one and a half hours, after hitting the circuit-breaker threshold.

Analysts said the circuit-breaker will not help control the volatility and restore confidence, unless liquidity inflow increases to support fresh buying. "It's not a solution. It's not an effective tool," said Yawer Sayeed, chief executive of AIMS, an asset manager. His remark came after the benchmark DSE General Index (DGEN) lost 226 points or 3.17 percent, amid panic sales. The slump made the investors violent on the streets again. "The result of the circuit-breaker will be nothing but protests, as you have seen today," said Salahuddin Ahmed Khan, former chief executive of Dhaka Stock Exchange. "It's not an effective solution. The circuit-breaker will result in decreased share prices," said Khan. "Such intermediate measures will not bring about effective results."

Stocks lost 660 points on January 11 and a day later, it sprinted up 1,000 points or 15 percent on a stimulus from the regulator. But a freefall returned the next day as liquidity crunch kept institutional investors shy from buying. Many investors entered the market late, inspired by bubbling in share prices in the last one and a half years. Now their hopes of making easy money is shattered by the consistent downfall, as banks that had earlier fed the bubble amid slack regulatory monitoring started liquidating investments ahead of the year-end, and complied with tightened monetary policy of Bangladesh Bank. Khan said the slump brought another problem -- a confidence crunch. "It appears that the market is heading towards a crisis," he said, suggesting increased money flow. "Any intermediate step will not be effective. It will rather deepen the instability."

Hasan Imam, chief executive of Race Asset Management Ltd, said the circuit-breaker is just one tool to manage the volatility. "It must be used carefully because it has some downsides. If the circuit-breaker is not used properly, it may intensify the panic," he said. Imam said the circuit-breaker may not bring stability unless the liquidity crunch is addressed.

News Source: The Daily Star/Bangladesh/20 Jan 2011