Liberation of N and E, economic activity help Lanka to recover soon

Statistics show that the Colombo Stock Exchange (CSE) in some ways performed better than some of the other markets, though the fact remains that the CSE continues to be dogged by structural and macro issues that inhibit its development,said the Chairman Nihal Fonseka.

Among them are the high level of broker risk, the lack of traded products, high transaction cost and poor liquidity. With regard to eliminating broker risk, a decision has been made to introduce a central counter party for settlements and the CSE is working on this.

Brokerage

CSE is undoubtedly one of, if not the most, expensive exchange in the world to trade on. A proposal to reduce the threshold for negotiated brokerage from the current high level of Rs 100 million per transaction did not find favour with the member brokers. In fact there is a move to reintroduce a minimum brokerage for even high value transactions which is a retrograde step.

The CSE also attempted to improve liquidity for the benefit of investors by improving the market microstructure and proposed (a) reducing the tick size to 0.10 cents from the current 0.25 cents, (b) reducing the lot size to 1 share from the current 100 and doing away with odd lots, and, (c) increasing the threshold for crossings from the current Rs 10 million to a minimum of Rs 25 million.

Counter arguments

None of these proposals could be implemented as they did not receive the approval of our broker members. In fairness to our members, it must be said that they did offer counter arguments against the proposals and also made the point that these proposals may not improve liquidity but on the other hand increase their processing costs.

Although nothing was indeed certain but since none of these measures were irreversible, the reluctance to try some new initiatives that would also force them to improve their own productivity was somewhat disappointing.

There have been positive discussions in this regard with our members as well as the Securities and Exchange Commission and it is hoped that it could be progressed expeditiously.

It is also to the credit of our broker members that there have been no settlement failures but the current infrastructure for risk management is woefully inadequate to move to a higher level of activity.

Listed companies

The next group of stakeholders that the CSE addressed in 2008 was the listed companies. The listing rules were revamped taking into account the new Companies Act, the costs relating to continuous listing, flexibility to raise new equity and better investor protection. With regard to investor protection, the CSE also commissioned a new automated surveillance system aimed at identifying irregular transactions.

The CSE remains committed to increasing the market liquidity and a short term initiative under consideration is to encourage same day trading. Day trading is not popular in Sri Lanka due to high transaction costs although it is very popular elsewhere.

Pre-requisite

Moves are afoot to get the transaction costs reduced for day trades. A longer term initiative is to introduce a limited range of derivative trading such as futures on indices and in liquid shares. The establishment of a central counter party to reduce the counter party risk is an essential pre-requisite for implementing this initiative.

The timing of the recovery of the global economy is still uncertain. However, we should not let this unduly cloud the investment decisions in Sri Lanka.

While there are some negative factors still to be dealt with in the short term, the opening up of the East and the North and resumption of economic activity connected with reconstruction and resettlement and the international support that these activities are likely to attract should help Sri Lanka to recover ahead of the curve.

The sharp decline in policy interest rates will no doubt feed into the banking system in the months to come and all of these factors should help to improve corporate profitability and investor sentiment.