Tuesday, March 15, 2011

in the hot seat in a forced sell situation

As the Compliance Officer in a stock-brokering firm in Sri Lanka, I have the unenviable task of having to force sell client shares in a market that has no buyers.

The forced selling has come about due to various changes instituted by the SEC in conjunction with the CSE that have to do with no longer granting credit to clients, a practice in the past, which in the determining of the SEC no longer constitutes a business activity the stock broker should engage in. In their opinion a margin provider should perform this service and this should be outside the remit of the stockbroker, who is governed by the rules of the CSE and SEC.

While these noble ideals are good in theory, it is the small investor in an illiquid market that gets massacred in this scenario. However much a stock broker tries to dissuade a small investor in purchasing highly dubious retail stocks that seem to go up and down without any rational reason, these very same investors feel that it is the only way they can make money, a very wrong assumption in my view.

The small investor (and I am generalizing here as there are many exceptions to this rule) is not very savvy and is prone to be misled, sometimes by brokers, but most often by other small investors full of myths and rumors of shares and their expected performance. I have had the misfortune of having to deal with many in the latter category, and trying to persuade them to dispose of shares at a loss, as in my view (and later proved correct) that they would fall further was something they were unable to stomach saying the reverse would happen if I forced sold their shares.

It saddens me to have to deal with this sort of client who in a market where the big boys are making billions and millions of tax free money to live the life of kings in Sri Lanka, are losing their shirt on these theories of theirs. Even worse they don't seem to learn from recent lessons where they have got burnt, not realizing that those unable to or not big enough to manipulate the market should only hold value stocks that will go up. The big boys are manipulating the market daily with no one even getting pulled up by the regulators who are totally impotent in their tasks.

I am and have been trying to safeguard the interests of the small shareholders, but find the regulator is their worst enemy, second being the big player, manipulators who due to the low level of liquidity, manipulate shares up, and the sucker retailers follow the pied piper right into the lake and drown, because the manipulator dumps his low cost shares at a high price on the unsuspecting small guy who gets slammed and crushed and barely comes out alive, only to get suckered again.

No wonder then that our voter gets the same treatment from the unscrupulous politician who lies and hoodwinks to get the votes, and continues to do so, as the elector makes the same mistake time and time again, as he is also a sucker and glutton for punishment.

Tell me of a candidate who has been elected if he speaks the truth!! We just like to hear and believe lies, but here I digress from my original purpose, and hope and pray we can educate the small investor in the virtues of long term value investing.

I earnestly hope that both the CSE and SEC realize that they are driving the small investor away despite all the talk to the contrary, as they are totally ignorant of what it takes to safeguard the small investor. If only they really know what has happened to the small investor in the past 6 months, they would have acted differently. But then again what do you expect from bureaucrats warming more and more chairs not earning their keep in this economy!!!


Anonymous said...

another instance of regulators not knowing the ultimate goal or purpose of their existence and using it merely as a power or ego trip to control others due to personal weaknesses on their part getting in the way of the ultimate purpose.

A typical attribute of bureaucracy worldwide, but particularly bad in SL case as most bureaucrats here are unqualified for the job!!!

Anonymous said...

It is a sad case of poor becoming poorer in the attempt to find some extra cash....
The rich are raking in the millions of tax free money... Regulator is there to safeguard the Rich bugger's interest because he has the money to pamper the regulator with gifts & etc...
It just shows the reality of the Sri Lankan situation.... Poor man is between a rock and a hard place...

Jack Point said...

I think this market has a huge problem with credit. If this is not sorted out we may experience a a default by a broker with a resultant chain reaction, of counterparty defaults, in the same way that the investments banks collapsed in the US.

My suggestion is that there should be a clearing house set up to handle all settlements with no intervention by the brokers. Individual customers need to settle with the central clearing house (run independently) so there is no accumulation of unsettled debts under one broker and there is full transparency of liabilities.

We don't want to end up with riots, like in Bangladesh, do we?


Anonymous said...

I completely agree with Jack's point (forgive the pun Jack), which is the intention of the CSE anyway. However in the interim period how we get there has to be managed without decimating the poor small investor, who finds it difficult to open a margin account due to his lower requirements.

In an illiquid market forced selling to reach mandatory targets actually means investors sell at 30% less than their cost.

Now that the big boys have moved into margin accounts the brokers don't have a credit or payment problem as their net capital is sufficient to meet all potential liabilities.

Just help the small guy out so he will return with dignity, not with hate!

Ratmale,Minneriya,Sri Lanka said...

In our case we have only about 4% of our debtors in this situation with hardly an affect on profit let alone net capital.

So there is not an issue for thefirm or the CSE except for the guy who is being forced sold, who is the person I was referring to as being the worst affected; the small retail investor who is about to lose his life savings!

Jack Point said...

I heard a story that one particular broker had around Rs1bn in such credit at one time, when the rules came up last year.