Normally all trades in listed securities are done on the trading platform of the Stock Exchange. They are then transparent and also ensure competition through the dual auction system where any person can outbid another to buy the shares on offer or can under-sell any shares on offer. This process ensures transparent competitive bidding.
But there are some large trades- large in size in relation to the normal market volumes, where the parties prefer to negotiate. They do not like any part of the agreed quantity being taken away by the market either by other buyers or other sellers offering smaller quantities to them at a price below the negotiated price. So most Stock Exchanges allow such trades to be done outside the market with only a reporting requirement for the parties to inform the Exchange after the sale. The Exchange will then publish the trade to ensure transparency.
Our Stock Exchange insists that the negotiated trades and large trades be done on the trading platform at a price which is close to the market price of the day. Such a trade may be done by a single broker or through two different brokers representing the seller and the buyer.
The Stock Exchange Rule about doing such negotiated trades through the trading platform compels the brokers to ensure that the market price is brought to the level of the negotiated trade. The news of the proposed crossing spreads among the brokering houses that in turn pass such news to their clients. So we see the market price of the share in question going up and up as speculators buys them in order to re-sell at the higher price which has been agreed to in the negotiations. This in my opinion creates a false market and we have seen several such episodes recently. The latest is the shares of the Peoples Merchant Bank which shot up from Rs 21 to 38. The Securities Exchange Commission then clamps down with a price band to be valid for 7 days.
Would it not be better to allow off-market trades in crossings after the Stock Exchange has approved the trade? Would it not be sufficient to report the trade instead of matching it on the trading platform? The danger in the present system is that the share price may rise way beyond its intrinsic value and when it cannot be sustained it falls rapidly and causes losses to those who did not sell in time either because of bad judgment or could not because of the price band.
The writer is an economist and is the General Manager of a Colombo based stock brokering firm. You can reach him via raja.senanayake712@gmail.com