More than a year after the Securities and Exchange Commission (SEC) imposed the price bands (PB), the industry is calling for their removal, saying the PBs have ceased to serve its purpose in the present market conditions. This came on the back of the Business Times article on September 18 saying the SEC was mulling removing PBs.
"The price bands have served their purpose. The SEC acted fast and strong on a market getting out of control. Given where we were in the market at the time, such strong action was warranted. However, I think it’s time now to remove it and move towards circuit breakers," Deshan Pushparajah, Head of Capital Markets Capital Alliance told the Business Times.
He added that circuit breakers are a more efficient method of regulating markets as these when breached would call for management to explain the reason for the extraordinary price movement.
“In some cases, the price movements are justified, hence large price movements should be allowed. Price bands in these cases serve to curb the free market flow and harm investor confidence," he said.
Analysts said that the whole context in which shares trade (now) has changed with stockbrokers being prohibited to grant credit to investors, margin lending facility coming in, etc.
A stockmarket source told the Business Times recently that the SEC has pondered some changes to the price bands and that they may change it, but nothing has been finalized.
The 10% price curb was imposed by the regulators on August 5 last year, disallowing shares to go up or down more than 10% in price amidst wide disdain by many traders. “When a share appreciates there needs to be sufficient cause (for it to do so),” he said, adding that attributing sheer (high) investor sentiment to a ‘crazy’ rise in fundamentally weak stocks reflects negatively on the market. Market wide index- based circuit breakers (which were in effect some time ago) are imposed by stock exchanges to halt trading of equity securities in order to provide a "cooling off" period when there is an unusual movement in the index.
The SEC is considering this," the source added. Analysts say that although the concept of imposing price restrictions only on highly manipulated shares are good, the way in which the formula itself is hidden by the regulators are very unhealthy and impacts the transparency of it all. The source said that now the unilateral imposition of price bands was not necessarily in the best interest of the market since it penalised all companies irrespective of whether there were genuine reason for significant price changes or not. “A more targeted approach has greater merit although it will be a challenge in defining suitable criteria,” he added, saying that circuit breakers will be an answer.