However a CEO of a stock broking firm told this reporter that that will not happen as broker credit is collateral based lending. “If it comes to a push we could always sell those stocks and shares held as security and recover our monies,” he said. That way the stability of the broking houses is assured, the source said.
He said that the reason why they are making this appeal is because retailers are unable to obtain credit from margin providers and banks.
The other issue that the broker community is pushing the SEC to do away with is the mandatory “T + 5” settlement cycle in regard to credit extended to investors, mainly retailers. “That results in forced selling, which has the tendency to bring the market down,” the source said, previously the “T+5” mandate was not there, with “T” being the date of transaction and “5” meaning five days after the date of transaction.
But another stock broking source contended that in a falling market, not only the value of the securities purchased on credit terms is liable to fall, but also those stocks and shares held as security by the stock broking community as well.
He said that if one or two broking houses of the 30 strong stock broking community in the island collapse, that’s sufficient to cause a systemic risk to the industry.
The problem is when it comes to settlement when such a broking house is unable to meet its liabilities, the source said.
Each broking house daily handles business worth Rs. 30-40 million, he said.
Some broking houses have invested three to four times the value of the shares held as security, the source claimed.
And, in a “losing” market, the casino mentality has crept into the mindset of some of the retailers, hoping that they could recoup their lost money in the next round of the “buy and sell” game. They are commission agents, not long term holders. As a result, some of those retailers have gone to the extent of mortgaging their houses to raise the required money for further investment in the stock market, the source said. Some of those retailers have lost millions, others have even mortgaged their houses to pay their dues to the market, the source said.
Both retailers and brokers have to share the blame for this state of affairs, he said. When the going was good everybody was happy, but when the market started falling after retailers had had bought high, that’s when the problem began, when the market took a nosedive, the source said.
Meanwhile coinciding with news of this broking houses’ proposed appeal, Thursday’s trading saw the benchmark ASI gain by 148.01 points (2.28%) and the more sensitive MPI by 134.22 points (2.26%) on a Rs. 1.5 billion turnover, pushed up by retailers, a source said.
On Friday the market performed even more impressively, with the ASI gaining by 191.82 points (2.9%) to close at 6,845.38 points while the MPI gained by 131.94 points (2.2%) to close the week at 6,210.07 points on a Rs. 3.1 billion turnover.
This hype is driven by some broking houses taking advantage of gullible retail investors, the source said. SEC procedures are such (the Commission meets only once a month) that there is no quick “yes” or quick “no” to the brokers’ proposal to re-extend credit, the source said.
He therefore said that those gains are unsustainable, in the week beginning tomorrow. “The bourse is over-priced and foreigners are staying away from the market, what the bourse needs is a sustained level of foreign buying to ensure its stability,” he said. The market PER as at Thursday was 21.54 times and the bourse as at Thursday has seen a net foreign outflow of Rs. 7.8 billion for the year to date.
Friday also saw the entry of state controlled EPF in to the market, buying some 500,000 shares of Spence at Rs. 140 a share. There was also a mix of high net worth and institutional interest in John Keells Holdings, including some 300,000 shares bought and sold by foreigners, at prices ranging at between Rs. 190-195 a share. Guardian, a company controlled by Carsons Group saw a million of its shares changing hands at Rs. 300 a share, which is believed to have had been a crossing with the the Group. Retailers on Friday chased after penny stocks such as “Greig” and Grain Elevators.
The macro-economic outlook however appears to be better, but the fear is the US debt crisis, he said. Meanwhile on Wednesday, the market backed by high networth individuals and institutions was able to hold on to Tuesday’s position, while retailers who had had lost heavily during the past few weeks were in the sidelines, a source said. The top notch investors however prevented the bourse from crashing though buying is sluggish, he said. They have the holding power.
On Wednesday, among the noteworthy trades were some 2.5 million shares of Browns being transacted at the Rs. 280/90 levels per share where the buyer is believed to have had been the Government controlled EPF. The active involvement of EPF gave the bourse a thrust the previous day (Tuesday) which saw the benchmark ASI gain by 59.24 points (0.92%) and the more sensitive MPI by 33.88 points (0.57%) over that of Monday’s close, he said.
EPF was involved in picking up stocks such as Cargills, Ceylon Theatres and Softlogic, the source added.
A rumour that the SEC was going to do away with the requirement that stockbrokers have to recover their monies lent to investors by the year end also helped to boost trading on Tuesday, he said.
SEC has mandated stockbrokers to recover 50% of their balance outstanding lent to investors by September 30 and the remainder by December 31.
This covers lending made by them to investors last year. This year they have however been precluded from lending to investors over and above the “T + 5” tenure. Designated margin traders are only now allowed to lend to investors.
The source however said that there is intense lobbying among sections of the broker community to do away with the requirement that brokers should recover their dues fully by the year end. But another broker said that most of the brokers have had already met with this requirement.
Meanwhile the source said that to have a disciplined market it was sine qua non that no broker should run the risk of default. To solidify that position brokers need to clear investor debtors’ from their books, he said.
Otherwise, say if two brokers default at settlement time that will have a cascading effect on the market, akin to a systemic risk that may take place if a commercial bank collapses, on the country’s banking system, the source said.
One is talking of Rs. 30-40 million worth of settlements per broker, he said. There are some 30 broking houses in the island.
Meanwhile at the beginning of the week (Monday), the market fell by 102.91 points (1.57%) and 135.1 points (2.24%) on the back of poor holding power by retailers. A source said the market is over-priced and that there is room for it to come down. The absence of foreign investments in the bourse too is attributed to its poor performance.