More than 9,800 points have been shaved off the benchmark KSE-100 in the last eighteen days. Short of a miracle, another major drop might be witnessed by the end of today’s session, looking for a bottom last charted in August 2019. That miracle may be called a solid technical support or beauty in the eyes of beholder, aka attractive valuations that defined KSE-100’s recent bottom. But what if that miracle does not happen? What if corona has coloured people’s perception of beauty?
These are no easy questions; but neither are these times. There are those who argue that a price floor should be introduced at the stock market. Others are hoping for a ban on short selling. Both are absurd ideas. As Khalid Mirza often maintains, the regulator should not favour the long against the short; it should be a neutral arbitrator between the two.
But what about sending the PSX on a holiday ala Philippines. Mr. Mirza is not particularly enthused about the idea; he would rather “let the market play itself out” and only “tinker (or correct) the regulatory wrong, if any”. PSX’s management doesn’t have any such plans for shutting down the market, and it does not deem it advisable either.
From one perspective, their view seems tenable. Shutting down the market is akin to usurping one of the key aspects of property rights: the right to sell at whichever price one desires to, even if at a loss. Shutting down the market may also multiply investors’ problems because their liquidity will be stuck in the system, although of course those who want to get out can do so through the kerb market.
Then there is that classic Alan Greenspan’s argument of exacerbating fear. He once famously said: “shutting down markets during a crash never helps - rather it only compounds investors’ pains. As scary as the losses may seem on paper, as long as the markets stay open, investors always know they can get out. Take away their exit and you exacerbate their fears.”
Yet we have had examples of market closures. At the time of First World War, the New York Stock Exchange was halted for four months; after the 9/11, four days. Athens’ for five weeks in 2015 because of the Greek government-debt crisis.
Common to these and other examples is the appearance of ‘black swan’ or the ‘grey rhino’. The former is characterised as an event which is a (a) surprise, an extreme outlier, and (b) has a major impact. The latter refers to highly probable but neglected threats that have an enormous impact. Covid-19 is in the former category, and unlike other black swan or grey rhinos, the collective human understanding of the nature, extent, and duration of the impact is still unknown. Because the event itself is still evolving.
Unlike the absurdity of the price floor of 2008, sending the PSX on a holiday may be seen as an extended halt, which the PSX has already seen quite often of late. Some may point to Dow Jones’ (then) biggest single day drop when trading resumed at NYSE after four days or 9/11-halt. In other words, the halt only delayed the inevitable.
Be that as it may, the purpose of the halt is not to prevent prices from falling; nor to delay the inevitable. Capitalism should not be a one-way street, which is why the 2008 price floor was absurd. The purpose of the halt, instead, is to allow investors the luxury of time to get a better sense of the situation. To that end, a week after corona has peaked in Pakistan may be a good timeframe for the proposed halt.
Prices reflect the balance of perception between buyers and sellers, and their collective wisdom, as investors make long and short bets on pieces of information available for an economy, a sector or a stock. But when the very information is not available, and buyers and sellers are trading in an environment of information void, or information scarcity at best, or even trading on wrong information, then just how efficient can that market be.
Pandemic tests - if not questions - the very theory of markets, even if handful of investors made the right decision. In policy affairs, it is not enough to be right, one must be right for the right reasons. If the PSX and the SECP do not want to halt the market, then so be it. But they should at least entertain the idea, present their arguments, and have an open discussion on the subject.
This is not a call to protect small investors from losses; with handful of UINs, there are hardly any small investors left in this country. It is a call for common sense. None of the stakeholders - investors, PSX’s board and shareholders, SECP commissioners - have ever seen a pandemic of this magnitude. If information and expectation, the fundamental basis of a functioning market, has broken down due to corona, then ‘to halt or not’ at least calls for an open discussion.
PS: It matters not that there are hardly any small investors in the market; it matters that the market must attract small investors to increase market depth and offer saving opportunities. Wild unchecked swings will only deter prospective investors, if and when the PSX is ever able to really pique their interest.