Stock exchange - market halt: sensible

Mint carried an opinion piece on the use of market halts every time the stock market moves up by a large percentage as is common in India, US and many other jurisdictions. The argument is that such market halts shift liquidity and trades to offshore markets like Singapore.

The piece concludes:

"This raises questions for Indian regulators about capital controls. Local investors in India don’t have ready access to SGX, but global ones do; hitting the circuit breaker then puts local investors at a disadvantage, while global ones can decide within minutes where they wish to move capital to. There’s another comparative disadvantage to note: While price discovery for the Nifty continues in Singapore, it doesn’t in Mumbai."

I disagree.

I think we now have sufficient evidence that day long market halts do in fact work. Just as the Sept 11 market halt followed by rational trading over the next few days indicated the world had not come to an end, the election result in India this past weekend has shown over the next four days following the market halt that we have not yet reached heaven.

My vote is for the market halts to stay, what we are exporting is not trades but stupidity. A few hours of irrational liquidity is something we can do without. Imagine the kind of losses Indian investors would have witnessed but for the halt. While I normally would allow people to be stupid and hurt themselves and learn subsequently, on balance, I believe circuit breakers are useful devices without substantial opportunity cost. I hope to write more about this subsequently.

Here is the Mint Opinion. 

Bureaucracy and judicial revenge

The Wall Street Journal has an interview with T.S.R. Subramanian, former cabinet secretary - which seeks to discuss his new book on the state of India. He seeks to demean politicians and glorify bureaucrats in a predictably self serving manner:

"Politicians, unleashed by the knowledge that they are very unlikely ever to be called to account for their actions, have come to dominate the civil service and twist it for their own gain."

I don't think bureaucrats need to demean themselves, unless they seek special favours and rent seeking in partnership with the politicians. 

It also has some usual cliches:

"The average Indian, Mr. Subramanian says in a chat over lunch, just wants the basics from his government. "I don't think Indians care about disparity but they want a minimum standard of living, food, a place to stay and clothing," he says. These are all things that the government has singularly failed to provide to the masses in the 62 years since independence." 

Hardly the thing to say when you have been cabinet secretary for three prime ministers and that too while giving an interview while playing golf.

Finally his comment on the judiciary sounds just wrong:

"The judiciary comes in for equally scathing criticism for its failure to bring politicians to heel and to exempt bad behavior that ordinary citizens would be jailed for. I sense no love lost between Mr. Subramanian and his brethren on the bench. At one point, he offers a theory as to the root of these judicial shortcomings. Judges and bureaucrats traditionally stemmed from the same English-educated class of graduates, he says. And "most people who came to the judiciary were people who failed the civil service exams." 

High Court judges come after practicing as lawyers for nearly 20 years and district judges too have substantial experience. They hardly come from the same class of test givers. To assume most lawyers (many of whom later become judges) appear for the civil services is a wrong fact, but to assert they are taking revenge on the candidates who succeeded while they failed is simply delusional.

Here is the interview in the WSJ. 

Competition Commission - finally takes off

Finally today, the Competition Commission of India will take off.  The lack of this key regulator was a result of bargaining trade offs between different rent seekers - for over 7 years. Much of it has been written about, so I will not discuss the past. However, the composition of the board, like that of most regulators is filled with people with limited or no experience from the world of real business or the practice of law. Like all regulatory appointments they will learn the ropes on the job. Pray for India they learn quickly.

The chairman is Dhanendra Kumar, former executive director of the World Bank. The others are Geeta Gauri, ex-director (tariffs), Andhra Pradesh Electricity Regulatory Commission; P N Parashar, former judicial member of the Income Tax Appellate Tribunal; HC Gupta, former coal secretary and R Prasad, former chairman of the Central Board of Direct Taxes.

Some realism in OTC derivative regulations

The US Treasury has come out with some proposed changes to the world of OTC derivatives. This world of OTC derivatives is a world where two seemingly very sophisticated institutions exchange packages of risks in a customised manner. Over the past year there has been an increasingly loud call to shift these contracts to the exchange space so that there is transparency and honesty in pricing and trading in these securities and there is a central counterparty which guarantees each trade. This is good only in theory.

The size of the market estimated at 680 trillion dollars would require a clearance and settlement system (risk mitigation systems like margining etc) which is simply not practical even within a space of a decade or more. To get a perspective, the GDP of the entire world is around 68 trillion dollars.

Further, however wrong the financial model in the present system, the wrong model would need to be transposed to the exchange space bringing the disaster to the exchange space, and creating a financial disaster which would be far more concentrated than the present crisis. This shift needs to be a lot more thoughtful than is currently being touted by one and all as a cure all panacea.

Other proposals in the papers relating to transparency and suitability are of course eminently doable; the latter is already in place and merely needs to be better enforced.

See news item on Bloomberg.

See the US treasury plan (it's quite brief). 

Stock market boom

While I wholly avoid making predictions on the levels of the stock market, the current bull run should be tempered with the fact that some of the most aggressive increases in stock prices in the US occurred between 1930 and 1933. With almost certain political uncertainty, the faint hearted should avoid the markets like a plage (or H1N1). We still have a long way to go with the current crisis to turn around here as well as internationally.