Shareholders need a rescue fund

Experience tells us that a simple warning sign is sometimes enough to ward off trouble. Let me offer two commonplace examples - the operation of CCTV and the presence of dogs. Such cautionary notices mould the behavior of most potential troublemakers, if not all. The near universal see-saw movements of capital markets we see from time to time make me propose the setting up of an institution for the purpose of calming the markets. Its mere presence should deter dishonest people from egregious market manipulation. 

The Dhaka Stock Exchange (DSE) has a long history. The bourse in Malaysia was born in 1964, a decade after DSE. The one in Singapore came into existence only in 1999. Compared to these two overseas cousins, the growth and maturity of DSE and CSE look stunted. While admiringthe efficacy of bourses abroad, policy makers just sit still. We do acknowledge however that Singapore belongs to the OECD and Malaysia is far richer than Bangladesh.
That capital markets (both equity and debt) are crucial for the prosperity and growth of economies is axiomatic. They are important cogs in the giant wheel of the financial system. The purpose of financial system is to allocate capital efficiently by matching deficit sectors with surplus ones in a transparent fashion.A good example of transparency and efficiency is “price discovery” in real time. The definition of efficiency continues to evolve in line withthe maturity and sophistication of markets.
Among others, efficiency depends on effective two-step regulation by BSEC/DSE-CSE, disclosures, accounting standards, market surveillance, securities laws, and a robust audit profession. When such a structure works smoothly, it signals to investors that, apart from temporary hiccups, the stock market is not a zero-sum game.In other words, their interests are being looked after. An important safety measure is a circuit breaker, triggered when price movements go out of line.
Man is a bundle of weaknesses. When the opportunity for making a fast buck beckons, he falls for it. Insider trading is the most insidious practice in this genre. Mainly company directors are found dabbling in this practice all over the globe. Insider trading arises because of what is known as information asymmetry. To be realistic, this cannot be done away with.
Because market players are not known for moral compunction, one has to be really gullible to trust their motives. Does it mean that the average investor has to have a masters in finance or call the CID for each trade? Not at all. But factors that contribute to the instability of markets are nether simple to understand nor easy to predict. Institutional as well as a section of retail investors routinely employ trading strategies to make a killing. With above average intelligence, this group is out to sacrifice lambs. So, if you are faint of heart, stocks are not your game.
The above analysis logically leads me to propose the establishment of an Investors’ Rescue Fund (IRF). Its main purpose would be to buy shares whose prices are on a down trend and sell shares whose prices have gone up by a certain percentage. The setup does resemble a market maker. The purpose is different though. Market makers generally deal in selected shares. The IRF will come into being with a bigger mandate and buy and sell all shares except dud securities-OTC and “Z” category ones.The company, under the aegis of BSEC, should have a substantial war-chest. Its purpose will be defeated otherwise.
If it follows cautious and judicious policies, IRF will start making profits from inception because of the time-tested mantra: buy low, sell high. It may also decide to patronise brokers having a clean record. I can visualise a big hue and cry though when IRF starts selling in an up-market,thus depressing prices.
This scheme, if followed in all sincerity, should help by introducing depth and breadth in the market and being a countervailing force to market imperfections especially frothy markets. Our investors have had their share of roller-coaster rides. Confidence and market stability go hand in hand.
* Raihan Amin is a consultant, CSQE