Market Matrix – Prevent markets from free fall in times of crisis

October 30, 2008

Friends,

The beauty of the market is in its being free. The stock markets are supposed to be left free and here the flow of information is also supposed to be unhindered and made available to all. There are still some impediments in the free flow of information due to some technical difficulties and some obstructions deliberately put in place by the interested.

What ever the case be the markets should be left without intervention but is there a need to control the markets when prices tend to hugely deviate from the seemingly normal price for the day?

In my opinion the intervention by govt should never be by any such rule. There is ,however, an implied obligation on the part of govt to see that the market does not attack the price levels beyond the reasonable level in a short time. It is necessary from the point of view of not letting any body unduly suffer just because market condition coincides with ones requirement of withdrawing cash. It is also necessary from the angle of not making the risk capital pooling to difficult or too costly. The participants would account for higher risk in the pricing if such times come about in markets or may come. This is a cost best saved by having some mechanism by which the absurd pricing on the up or down side is prevented. If an economy can reduce the risk element in risk capital due to abnormal conditions, it will be a great economic service to the nation at far lower cost than by any other means. I think these should be the only purposes and none else while the govt does something to stabilise the market. I repeat that intervention in free trading by rules will be negative.

How can it be done? In India it is very easy to do. The state owned banks should have some pocket where they have stocks and funds ready for use in terms of their researcher’s advice. The second is that RBI can have sovereign fund allowed to be funded in times of such need by RBI’s large kitty at the shortest notice while its stocks related economic researchers should be updating the applicable action plan on a regular basis.

There is a further need of having a board which may order entry into market when need arises. Top secrecy should be maintained about the intended size of fund deployed for the purpose . It should best be done by wide speed buying rather than in a concentrated fashion.

Another point that would save the markets is that there should be no funding by the banks for share purchase. The risk capital should be from out of only the owned funds and not borrowed funds. On private basis people may do whatever. In fact promoters also should not be funded on the strength of share holding in their own companies, neither the shares should be accepted as security for other advances. This will bring a balance and put a premium on the shares. The present day world crisis is due to faulty home mortgages, what would have happened had there been large scale lending backed by stocks. Since there always is necessary liquidity available one should meet his short term need selling stocks and buying back when the funds are spare.

The leverage obtained in market in ‘F and O’ section is not based on financing by institutions and is mostly private arrangement through the mechanism and hence it is Okay. The lending and borrowing of shares for sale etc should also be restricted
to individuals and direct owners like corporates and not be done by institutions who are not direct owners of shares like MFs and other such entities.

In fact leverage is mostly a tool in the hands of organised cartels in markets who try and take advantage by manipulation. There scheming goes to the extent of either perishing themselves or perishing those on the other side.

The US Fed has reduced rate by 50 bps with assurance that more will be done if required. It was a unanimous decision.The US market has not reacted up as it was already a known thing. However, the Asian stocks have shown good jumps as every passing day the stability is returning. The interest rate cut is the best medicine for ailing stocks, it works at many levels about which I have explained earlier. With rate cut here, our economy can enter in fast lane overnight but the RBI always wants to be seen as an elephant taking turns slowly while if Indian economy has to be tiger like the RBI will behave in a tiger like fashion. I despise Reddy’s raising of CRR and had raised alarm then itself. If he had been slightly imaginative India would have maintained its edge on the world scene. The present chief should at least see the light of the day.

These outpourings may seem scholarly but in fact are just for the purpose of giving back ground idea to the young.

HariOm,
Krsna Khandelwal

BIRDINFO Stock Rx – A prescription for stock market

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One Response to “Market Matrix – Prevent markets from free fall in times of crisis”

  1. Anonymous Says:

    Do you see the inherent contradiction in what you write?

    “In my opinion the intervention by govt should never be by any such rule. There is ,however, an implied obligation on the part of govt to see that the market does not attack the price levels beyond the reasonable level in a short time. “

    Who’ll decide the reasonable level?

    Market or external forces?

    Talk about speaking with forked and confused tongue!


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