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5/28/2006

stroking of the stock market

We have seen the first intervention in the form of an assuring statement by a top MAS official to calm the nerves of investors on Thursday. Then the visiting MD of IMF also added his two cents worth towards the same objective. And on Friday confidence returned to the stockmarket. Not that credit should all go to the two officials for their timely comments. The Dow gained more than 90 points the following night which gave more support and assurance that the world equities markets were not going to go on a free fall. And all these help in their little ways to arrest the slide further down. Despite all the above, it is still not enough if the mutual funds refused to take heed and continue their selling. All it needed was a handful of stocks to register double digit falls and fear will creep in again. And the herd instinct of running for safety during uncertainties will lead to an eventual crash. Our market is so precarious because of its minute size, and more frightening is the lack of any contigency plan to prevent a repeat of the financial crisis. The need and urgency for such plans to be incorporated and be ready to activate cannot be ignored and delayed. The mutual funds and foreign capitals could behave like financial terrorists. And a timely hit can create damages that could be devastating to our economy and would lead to blood on the street. What could happen is for some bad news or rumours to spread. Even without that, all it needs is for a blue chip stock to fall by 10-20% in price and people will scurry for cover. All the weak holders of the stock, the punters or short term traders will just sell out. And the shortists will jump in to accelerate the fall. And the fall deepens. Programme selling kicks in. More sell off. Then margin calls will be triggered, leading to more force selling by the banks. By then the price would have gone more than 20%. When a stock is hit this way, broking houses will impose curbs on trading the stock. Mostly it will be a case of sell only, no buying allowed except with cash out front. It becomes a vicious downward spiral. This can happen to one stock or several stocks or the whole stock market. There must be systems and procedures to prevent such incidents, from a spark turning into an inferno. An example is to halt the trading of a stock or even the whole market. Print out the data on the big sellers. Call up the company of the stock affected to confirm that there is no genuine bad news. Assess the damage and the real contributors to the fall. In the case of a funds selling out, especially shorting of the stocks, a standby fund can be utilised to buy into the stocks. The big sellers should also informed that intervention will come in and be advised to stop their selling. Public statements be made to explain the truth and regain confidence in the stock or market. And when nerves have been calm, sanity returns, the stock or market can then resume trading, maybe the next day or a few days later. This is only a layman's simple suggestion. The people managing the system will have better and more comprehensive ideas to protect the system. The attack on the stock market can be treated and handled like a terrorist attack. Plans can be made in advance. Operational teams and details be worked out, even simulation be test run to measure the effectiveness of the countermeasures. It is reckless to leave the fate of our stockmarket to chance and to the manipulation or assault by foreign financial terrorists. Or should it be licence to kill for the mutual fund operators?

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