One trade, handful stocks, 2% fluctuation and the Circuit for the day; Is the new directives from SEBON practical enough?

Ever since the capital market of Nepal opened its door to online TMS (Trading Management System), despite of sup-par performances, I’m one of those few millennial who really think that our futures are going to be bright in this market.

The situation that I witnessed so far is disappointing. Let me focus on the situation that the recent directive from SEBON has brought about. After the recent guidelines from SEBON, a fluctuation of 2% is allowed after the opening price range is determined which could fluctuate up to 1% of the previous closing price (i.e. a total of 3% per stock per day at maximum). Talking about NEPSE index, it is set at a 2% circuit range; meaning the trading would be halted for that day after that threshold of 2%.

The very decision was appreciative when the closed doors were open to the traders and investors. However it is equally disappointing to know that regulators in the 14 points circular dated 05/08/2020 were not able to give further explanations as to how the 2% range would work. Thinking straight, we could only expect that the day’s trade would end with just 10 shares traded with high market cap. The case was clearly seen yesterday (May 12, 2020) where we could see the single trading of CIT stocks alone hitting Rs 8.88 crore mark out of the total Rs 10.45 crore. The market too closed with a negative circuit of 2% before the closing hours with a few other companies traded in minimum quantity. This is because at present the online TMS system allows us to place our orders at a maximum difference of 2% on either side on every trade. This would not have been of any problem previously as the overall circuit limit was 10% which would be achieved only after 5 transactions at earliest.

I have tried to further explain it with an illustration as follows:

Illustration:
Trading before 05/12/2020:
A stock with the market price Rs. 200/share with opening price at one particular trade can be either traded at Max Rs. 204/share or Min Rs. 196/share which is a difference of 2 % as allowed by TMS. However, the trading doesn’t stop for the day as the overall circuit limit is of 10 %. So, multiple trades would be possible ( at least 5) before the individual stock or the overall NEPSE index reaches extreme limit of 10%.

Trading on and after 05/12/2020 on the basis of present circular:

In an absence of further clarification from the regulators, I had already assumed such a technical issue might arise on the first trading day after lockdown. As the maximum fluctuation limit is set at 2 % (equivalent of 1 trade limit on either side) after the adjustment of 1% change for setting up the opening price ( i.e. total of 3% either ways), this led NEPSE index to reach its circuit of 2% in no time when the stocks of companies with high market capitalization hit the upper or lower range, halting the day’s trade. 

What could have been a easy solution is that the trading range could have been reduced either to 0.50 or 0.75% both for upswing and downswing after reaching to a common consensus. This would have provided scope of multiple trades in between even if the NEPSE index has to reach its circuit limit of 2% for the day respecting demand-supply forces. Next, SEBON and the other regulators could have sat down, done some brainstorming and come up with another set of guidelines so as to allow a more vibrant trading environment rather than taking the current wait and watch approach.

I along with thousands of my millennial friends who are thinking about making a career out of the capital markets here in Nepal are looking forward to these or similar adjustments.

-Astitwa Sharma

(The writer is an investor in the capital markets of Nepal for the past 10 years with a brief trading history in Indian Capital Markets)

Disclaimer: Views expressed in this article  solely reflect the personal opinion of the author. Publication of this article doesn’t mean that the editorial team at Sharesansar has allegiance to this idea whatsoever.