Local stock regulators have been asked to re-visit some practices of the stock market in a bid to address its illiquidity by the consultant team on derivatives which was hired by the Securities and Exchange Commission (SEC) of Sri Lanka.
"The spot market (share market) is pretty illiquid in Sri Lanka and it is important to re-visit some decisions of the regulators in order to improve liquidity," Ajay Shah, consultant for the SEC commissioned report on Transforming Sri Lankan FinanceThrough Exchange Listed Derivatives told The Sunday Times FT. He suggested introducing intra-day trading (where an investor buys a share in the morning, sells by afternoon and clears his position without taking it to the next day) for day traders, (who are also called retailers).
Here, he said a 'naked short sell', where an investor sells a stock without owning it, should be implemented. "Some market rules are deterring these day traders. For instance, it is alright to sell a share that an investor does not have and later place an order to cancel that selling (reverse transaction). Now the Colombo Stock Exchange (CSE) will check with the Central Depository System (CDS) whether this investor still has shares," he explained.
He noted that this is a unique practice to Sri Lanka. "What Sri Lanka has now is a Gross Settlement System (GSS). We recommend a Net Settlement System (NSS), because the GSS deters day traders," he added. But some brokers said the NSS is dangerous in an illiquid market. "This is why it is important to strengthen the existing equities and improve market liquidity," Mr. Shah said.
He also noted that all fixed regulatory charges such as SEC, CSE, CDS, broker charges and transaction taxes are high. "These are very high compared to other countries. Sri Lanka needs to be on par with international standards and have low charges," he said.
He also noted that despite the size of the market in the country the activity levels are very inadequate."Introducing derivatives will help the basic development strategy and core business of the financial sector," he said.