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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » T+5 Rule of SEC reason for perpetual market decline- Investors

T+5 Rule of SEC reason for perpetual market decline- Investors

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aladdin

aladdin
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
By Hiran H.Senewiratne

Leading investors and stock brokers said that stock brokering firms have to go through almost impossible tasks due to force –selling of more than 1000 client for a day when each market day have become a T + 5 Rule of the Securities and Exchange Commission (SEC).

On 29 December 2010 the SEC issued a directive which mandated for stock brokering companies on forced-selling by the T+ 5 ( transactions on five days) , securities of buyers, which are in default of settlement by the T+3 Rule. Therefore, from 7 January 2011 each market day became a T +5 force- selling day, which put every stock brokering company and local investors through a difficult situation whether the market goes up or down, stock brokers told the Island Financial Review.

Even if the stock buying quotations are much lower than the previous transaction price share could be obtained through forced-selling though back officers of a stock brokering company, which is not done in consultation with the particular owner of the share, which ultimately destroys the market due to unnatural interference in price discovery, investors said.

According to the SCE Annual Report 2010 new accounts have increased from 18,705 to 52 285 during 2009 and 2010 respectively. A large number of local individual investors have increased significantly, which accounted for 44 per cent of the total stock market turnover, while foreign institutional buyers account only for15 percent of the total market turnover.

Further, the Central Bank directive in 2011, limited credit exposure to customers for the purchase of listed shares and loans granted against listed shares from a period of less than one year shall not exceed 5 percent of the loans outstanding as at end of the preceding quarter. This directive increased the liquidity crisis as the few banks engage in marginal trading stopped taking any new clients from stock brokering firms said.

"This further worsens the situation by informing the large investors to pay up this margin trading failures," investors said.

When banks and finance companies can leverage 10 times, stock brokering firm could be allowed to leverage at least once so that small investors who have supported the government cannot get credit facilities, who account more than 45 per cent of the total turnover, he said.

Further, marginal trading investors in the stock market do not provide facilities that any investment not less than Rs 2 million, which drastically affects the market performance, he added.

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
If people can't pay why do they buy them? What the brokers should do is if a customer has not paid their debts on time don't give them more credit next time. These brokers are so cunning.

sajeethk


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
when the market come down margin limits also come down... so if not put money to margin account the margin account holders also have to sell their share to reduce their credit.....

so it like inter related when market go down...

kam2011


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Yes. Problem is when the market is red for around 50-60 days(except for few days) everybody's PF value is drastically falling down and accordingly credit limits too come down. Due to this reason Brokers or credit providers will have to take action for force selling to keep up with SEC rule. This will cause for further drop of price. Finally it is a endless story until most of investors find their way to cemetery.

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
If you triggered a chain reaction it is very hard to stop.

I do not know why the authorities cannot see this in advance.

lokuayya


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Yes Chinwi, They should have the brains to foresee the situations.It is more than credit clearance now.they Totally mismanaged the credit issue .
The credit clearance could have been done without causing much erosion of the market and the investor base.

Now most of the investors including HNWI expect the removal of Mrs Nasaranee.
see the Sunday papers articles by influential Businessman.They are people with many years of experience .

Other thing is every all the businesses need credit.
If we didnt take credit today there are no Mahaweli project,super highways Power Plants etc.The new society cannot act like old retirees who does not like credit.
They want CSE investment as credit free like as "MARANAdAARA SAMITHiYA" .
this is the thinking of Mrs Nasaranee and the crowd .Credit is like filth to them..I dont blame mrs Nasaranee for her thinking because her limited exposure to industry ,lack of education in finance,years getting chronic with SLAS lethargy etc.Some one in the authority should see her inadequacy and make some changes.

country's capital market cannot work like a credit free maranadaara samithiya or subasadaka sangamaya of the village
those who take risk such as Dammika Perera are the people who change the country,Create employment,Fuel the engine of growth.These kind of people are high risk takers.They all worked with credit.still they need.

Market or any industry cannot grow only on savings.Leveraging is a must for the growth.




econ

econ
Global Moderator
T+5 is the most stupid rule those idiots bring to the market.

econ

econ
Global Moderator
These SEC idiots should take responsibility and go home. They ruined the market by bringing some stupid new rules and regulations. investors already lost the confidence on market. for example BIL IPO is fairly valued IPO with PER of below 5 and still trading below IPO price in the initial day.

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@econ wrote:T+5 is the most stupid rule those idiots bring to the market.

Yes. They have given 2 extra days. They should have made it T+3. http://www.sec.gov/investor/pubs/tplus3.htm
Problem with SEC is they're too soft. They should be firm and cancel the license and put the brokers in jail who are not following the laws.

econ

econ
Global Moderator
@duke wrote:
@econ wrote:T+5 is the most stupid rule those idiots bring to the market.

Yes. They have given 2 extra days. They should have made it T+3. http://www.sec.gov/investor/pubs/tplus3.htm
Problem with SEC is they're too soft. They should be firm and cancel the license and put the brokers in jail who are not following the laws.

Dude , those idiots allowed broker credit long time ago. untill last two years those idiots did not say anything about it. suddenly they change the rules like stock market is thier own property.
Stock market is not the property of those idiots. it s belong to whole country.

mono

mono
Vice President - Equity Analytics
Vice President - Equity Analytics
@duke wrote:
@econ wrote:T+5 is the most stupid rule those idiots bring to the market.

Yes. They have given 2 extra days. They should have made it T+3. http://www.sec.gov/investor/pubs/tplus3.htm
Problem with SEC is they're too soft. They should be firm and cancel the license and put the brokers in jail who are not following the laws.

Erm...

If you read that it's pretty clear that it's upto the broker to decide what to to do after T+3 in the states. He can either choose to force settle or charge an interest rate.

Economies and markets run most efficiently when regulators and government don't meddle in the day to day running of businesses. That is not to say that there should be no regulatory framework. But that the frame work should allow firms freedom to work within certain limits.

If the regulators are worried about credit then they can simple put a tight cap on brokerage credit as a multiple of the brokerage capital. then let the brokerage do whatever it wants within this limit.

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
A market cannot run mostely on credit.. real money involvement is a must.. T+3 would've been the norm and not T+5.. When SEC allow the broker to force sell by T+5 inevitabaly it increase credit period while brokers could've done it earliest when T+3 is not met... allowing more credit to float freely on the market is not a good practice..

The clearence either could've done in stage by state, say 10% a stage then allow the market to go with it without allowing more credit..

See now it triggers a T+5 everyday..

lokuayya


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
we do not know what they will do , sometime they will not do any thing to stop this crash.
forgetting credit is good or bad ,let us see what will happen if SEC do not take action.

If they do not relax credit rule market may go back two years .huge capital drain possible.This down trend get accelerated.
Those who have cash would be luckier to buy shares very very cheap.We may see the prices that we had seen during 2008 war period.

but even those who are in cash cannot expect market activity levels like before in future.market would be a dull flat .putting money in 7% savings accounts may give better results.

rijayasooriya

rijayasooriya
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
@econ wrote:T+5 is the most stupid rule those idiots bring to the market.

Totally agree with u.
Let me remind that story of the king,monkey and the fly.
Once upon a time there was a king with a monkey as the best friend.
Oneday while the king was sleeping a fly was disturbing him.
Monkey tried to throw away the fly.
But it kept coming.

As a dearest friend monkey took the king's sword and hit the fly while it was on the king's neck.

sapumal


Vice President - Equity Analytics
Vice President - Equity Analytics
This is not a problem about T+5. This is about how they implement the system. As I said earlier they trying to correct 100% wrong system to a 100% perfect system in very short period.

Now this has become a chain reaction.
SEC people can understand the situation because experts are selected to those positions. If we can understand and see the chain reaction why can't the experts ? They must be sleeping or not observing CSE for a quarter.
The thing is after all they are people. They not come to those positions to do a great service to the nation. They are there to make some money for them.

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