If the pattern on the first day under the new trading regime (‘call auction’) instituted by SEBI for illiquid stocks is any indication, the system seems capable of filtering out speculative activity and curtailing price volatility. Only a third of the stocks designated as illiquid were traded on the Bombay Stock Exchange on Monday, while on the National Stock Exchange it was only a fifth. These numbers help to underline the fact that that genuine investment interest is absent in many of these stocks and the volumes recorded in them in the past, were largely of the speculative variety. The regular trading regime provided a convenient mechanism for a buyer and a seller to engage in a collusive behaviour to ramp up the price of a stock, by the simple expedient of synchronising the timing of their respective trading actions. Since the target of price manipulation was an illiquid one, the prospect of genuine investor interest in that stock at that precise moment can be safely ruled out. In the event, the bunching of orders and matching and executing them in a burst of eight minutes once every hour under the ‘call auction’ system, will ensure that those outside the inner circle of operators with speculative intent get a chance to push their orders through at the inflated prices. Additionally, the monetary penalty that SEBI has imposed on investors punching in a buy order that is priced higher than the sell order, put through in the same session, is also targeted at curbing circular-trades that are put through with the intention of manipulating stock prices.
It is an unfortunate facet of the Indian market that it is saddled with a large number of listed stocks of companies whose financial performance has consistently been in the red. The fact that many of them are quoting at 90 per cent discount to their issue price is not just an invitation for price manipulation, the poor returns in them has also led to apathy among genuine investors who have relegated them to the bottom of their portfolio. Shifting such stocks to the hourly call auction safeguards these stocks from price manipulators, while keeping a window open for investors to exit these stocks, if desired. While manipulation cannot be said to have been completely eliminated, it is fair to say that mounting such an operation has become just that bit more expensive.
What should gladden the hearts of genuine investors is that many among the illiquid stocks that were traded on Monday under the new regime recorded volumes that were higher than the average daily volumes recorded in the past month. The price movement too, was not adverse in all the stocks, with some of them actually registering a modest rise. There is thus clear evidence that ‘call auction’ system will not unnecessarily throttle investor demand. The move also appears to have curtailed volatility in some stocks, with prices moving in a much narrower band than in the past.