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Window Trading
BY Rabindra Bhattarai
August 2005 saw a number of ups and downs in the Nepal stock exchange and this trend continued in early September as well. The phenomenon is best explained by nothing else but ‘window trading’.
The stock exchange opened August 2005 with all inclusive Nepse index at 299.61 and closed at 290.59 losing 9.05 points during the month. Early September, it saw a revival of sorts reaching 298.33 on September 6 at the close of the market.
Though some observers attribute the September revival to the sudden announcement of the three month ceasefire declared by the Maoists, deeper analysis has shown factors other than the ceasefire to be more powerful.
The ceasefire is for a very short period. Therefore, though there was a brief rally upward in the market immediately after the ceasefire announcement, it could not be sustained. Obviously, the early September spurt was caused by some speculators and they were ignored by the general investors.
The market in this period had received two new information – both related to IPOs – from Siddhartha Bank Ltd. and Chilime Hydropower Company Ltd. and this information should rather pull the market down (not push it upward), because such news prompt investors to cash their investment in the secondary market and invest it in the primary market.
Therefore, the more important factor for the market spurt is what can be called as the ‘window trading’. Here is the explanation:
Nepse floor is, by rule, strictly closed to everyone except two representatives from each member broker of Nepse. Similar is the practice in all the stock exchanges of the world. Investors have to place their buy or sell orders to the brokers before they enter the trading floor and during the trading period no direct communication is allowed between the broker inside the trading floor and anyone (broker or investor) outside the floor. The investors or other people are, however, allowed to observe the activities of the floor from behind a glassed window of a specially appointed observation room.
The idea is to stop the outsiders creating undue psychological impact and distorting the market. If such communication is allowed, some people may quote higher or lower for scrip just to push the price as they desire. Telephonic conversation between the inside and the outside of the floor is, however, allowed as such communication would not be able to make much of an immediate impact.
Till a couple of years ago, investors were allowed by Nepse to observe the trading floor from a closed observation room, but it was stopped after the state of emergency was first declared. As the investors repeatedly demanded the facility to know how the stock prices were moving inside the floor, Nepse arranged price change announcements over a loudspeaker. But this was also stopped after sometime. Then, the investors found a window opened to the floor and they are using it not only to observe the floor activities but also to change their instructions to the brokers on the floor and thus influence the market.
The effect is that small investors who cannot manage to reach this important window are adversely affected. If the broker has been instructed to buy the stocks within a given range of prices, these window traders can manipulate the price in such a way that the investor will have to pay a higher price. Similarly, the sellers get the lowest price of the band. More importantly, with such window traders frequently instructing the brokers inside the floor, the brokers cannot have the time to attend to the orders of the absent investors who placed the orders at the broker’s office.
The combined result is that the market’s efficiency to smoothen the prices of the stocks is minimised.
The most important reason why the Nepal Stock Exchange is reluctant to close the window is the profit motive of the stock exchange. The window is helping to increase the trading volume whereby the stock exchange too gets a higher commission income. If the window is closed, the trading volume may decrease and so will the Nepse income.
But should Nepse’s profit consideration be allowed to overtake the consideration of the overall market efficiency?
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