23 May 2009

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

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