Lop-sided trading bands proposed to rescue stock

Wednesday, May 14, 2008
Lop-sided trading bands have been suggested as a measure to rescue the falling stock market.
If the stock market keeps falling for a long time, investors’ confidence in the market will be lost and the stock market will collapse. Therefore, experts have urged the Ministry of Finance and State Securities Commission (SSC) to take actions urgently to rescue the market.
No transactions for many share items
The stock market witnessed another lackluster day on May 13, when the trading volume under the mode of matching orders in HCM City was VND39bil only, just equal to 5% of normal days. The trading volume was VND17bil in Hanoi.
A lot of share items like BTC, HAX, HDC, and ST8 did not see any transaction.
Investors, letting things run their course, tried to sell stocks. The share prices are now just equal to 15-20% of the highest peak price levels.

SSC’s Head of the Market Development Division Nguyen Son once stated that the commission will ‘apply strong measures’ when necessary if the market falls into uncertainty. And now is when investors are expecting the promised ‘strong measures’.

Which strong measures?

Hoang Xuan Quyen, Investment Analysis Director of Tan Viet Securities Company, wrote on Thoi bao Kinh te Vietnam that there are six possible strong measures:

1. Temporarily halting transactions for a certain time

2. Closing the market when the VN Index and HASTC Index fall into the ‘dangerous areas’

3. Narrowing the trading bands

4. Providing more room for foreign investors

5. Limiting the sales of mortgaged stocks by commercial banks

6. SCIC (State Capital Investment Corporation) to join the market

According to Quyen, No 1 would not be easy to implement as it requires the agreement of all market members. Moreover, SSC thinks that drastic measures are not necessary at this moment.

No 2 proves to be unfeasible, as there is no concept of ‘dangerous areas’.

The two last measures, No 5 and 6, were applied in the past, but did not bring desired effects.

No 4, raising the allowed foreign ownership ratio in local companies, has been a hot topic in the discussion of investors and securities experts, who consider this an effective way to stimulate demand. However, state management agencies are still hesitating to raise the foreign ownership ratio, as this is considered a risky solution. The agencies are still worried about a massive capital withdrawal of foreign investors which could lead to the collapse of the stock market.

Regarding the application of trading bands, Quyen thinks that SSC will not use the tool once again (In March, the trading bands were lowered to 1% and 2% for HCM City and Hanoi trading floors, respectively, and then have been raised to 2% and 3%).

Quyen said that many developed market are still applying the trading band scheme in order to avoid market ‘hyperactivity’. Austria and Turkey, for example, are applying the trading band of +/- 5%, Taiwan +/- 7%, India +/- 8%, Argentina, Mexico, Spain and China +/- 10%, while Malaysia and Thailand +/- 30%. Some countries are applying lop-sided trading bands like Belgium (-5%; +10%), France and Italia (-10%; +20%), Philippines (-30%; + 40%), and Japan (-10%; + 60%).

However, many others think that the application of the lop-sided trading bands will help rescue the market.

Nguyen Chinh Nghia, General Director of Hoang Gia International Joint Stock Company, said that previously, when Taiwan’s market was gloomy, Taiwanese authorities applied the lop-sided trading band scheme (the allowed maximum price increase is higher than the maximum price decrease. The “-10%; +20%” trading band means the share prices of the next trading session must not be 20% higher and 10% lower than the prices of the previous session).

If the lop-sided trading band scheme is applied, investors will regain their confidence in the market if they feel that the stock market has fewer risks. This will encourage them to make transactions, which can help stimulate demand.

Nghia said that in Vietnam, the price decrease should be limited at -0.5% or -1%, while the price increase should not be limited.

Analysts say that the solution may cause side effects, but most importantly, it will help restore investors’ confidence. Meanwhile, if the market falls into decay, it will be impossible to restore investors’ confidence.