With regards to the non-functioning margin & short trade any reduction in the requirements for margin trade would certainly pump more liquidity on the capital market. Thence, ceteris paribus, the higher liquidity would become a catalyst for higher prices and price multiples.
Any regulatory decision in this field should initially measure the influence of the REPO-contracts and the extent to which they have already satisfied the liquidity needs and whether it is actually the REPOs that have already augmented the current price levels undeservedly. On the other hand one should think of the same requirements regarding the short sales, (e.g. as in the current regulation 16 of the FSC), in order to balance the excess liquidity, caused by the lower margin criteria.
Additionally, any decline in those requirements will foster the performance of the more advanced intermediaries with more sophisticated software and risk solutions, such as the banks. Bearing in mind the widely spread, archaic trading systems in the market, any decrease in the short & margin requirements would definitely result in a liquidity flush and most probably cause significant price volatility.
5 comments:
I don't think the increase in volatility is necessarily bad for the market. While it can cause mainly technology problems, it could help market makers by prividing more business as they will search for ways to profit from it and hence stimulate the development of the market.
Valia,
I think that short sales are necessary for Bulgaria, although the implementation should be coordinated with market participants. According to me, the main problem is the poor technological background of the Central Depository and Bulgarian Stock Exchange. In particular, there is no clearing institution in Bulgaria, so the implementation of short sales could benefit the big brokerage houses, which could provide such a service.
Anyway, as far as I know market participants are able to make short sales and overcome the law restrictions. One possible way I have thought of is buy a short index on Sofix (e.g. from ABN Amro) and then buy shares of the equities that you want to short less. So, why wait any more?
Haralampi,
Minneapolis
Generally speaking about volatility, I agree with you, ANONYMOUS, that it is not a necessarily a bad thing. However, the Bulgarian capital market is already quite volatile compared to other European emerging markets. We compete for investors with these markets. In this particular case, given current, still inflated, price multiples, an even higher volatility would mean that we offer investors to take more risk for a given quite unattractive for emerging markets return. The overall result will not be in our favor.
HARALAMPI, I cannot agree more with you that one can mimic short and margin sales even without the enforcement of a stricter legislation in Bulgaria. However, these strategies are currently expensive to implement, which squeezes returns. A proper regulation will definitely bring in smaller players and thus enhance liquidity.
While volatility is important for risk assessment, I think the main problem of the Bulgarian market is the low liquidity. Therefore, it seems that the implementation of short sales would somewhat help to deal with this problem. Higher liquidity would not be achieved through short sales and margin trade in the long run. However, it seems that the increased risk due to volatility could be "compensated" with the higher liquidity.
Sure, but it will help develop the market. The more instruments, the better. Otherwise it is really hard for a Portfolio Manager to beat the market for a longer period of time.
Post a Comment