Tuesday, Oct 22, 2019
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BISX rules must change

 Dear Editor,

The Jamaica Stock Exchange facilitates about US$2.2 million worth of trades per day. The Bahamas International Stock Exchange (BISX) facilitates a paltry US$125,000 worth of trades per day. Thank goodness we hold our own in track and field, because in the financial markets, we’re choking on Jamaica’s dust.

BISX’s listless performance is more than just a matter of national pride. It is a matter of national concern. Dynamic stock markets lead to dynamic economies. The more actively a nation participates in its own stock exchange, the easier it is for small, young companies to get the funding they need to become large, mature companies. This process stimulates employment and GDP growth and broadens economic development. For a developing economy, an active national stock exchange is not a luxury; it is almost a necessity.

In the long run, the best way to increase activity in our local market is to increase our national financial literacy. In the short run, however, there are two changes BISX could implement today that would increase trading and participation.

First, BISX can remove the rule that stocks can only trade within a band of plus or minus 10 percent from the previous day’s closing price. This arbitrary restriction leads to months, and in some cases, years, where our local stocks do not trade at all, because there is no one willing to buy or sell within that 10 percent band. It is absurd that we shoot ourselves in our own foot by deliberately limiting trading in this way.

Second, BISX can change the rule that 1,000 or more shares must trade in a single day for the price to change. This threshold should be lowered to 100 shares or removed all together. Restricting price changes restricts price discovery, the process by which the market finds the price at which there are no excess buyers or sellers for a stock. Price discovery is perhaps the number one reason markets exist! Restricting price changes also strangles the incentive to invest. After all, one of the key enticements to invest is to profit from price changes. The potential to turn intuition and research into a big profit is what originally attracts many people to investing. It is why Warren Buffet’s books are instant best sellers and why TV shows like “Billions” are popular all over the world. Without price changes, investing in stocks becomes akin to investing in bank savings accounts – and how exciting is that? We should be trying to increase the frequency at which stock prices change, not decrease it by stipulating that, in effect, certain smaller trades made by certain smaller investors somehow do not count.

Together, BISX’s two trading restrictions greatly decrease trading frequency and impede price discovery. For example, the number of prospective buyers who want to buy Arawak Port Development stock (APD) at the stated market price of $17.43 might be greater than the number of words in this column. The number of prospective sellers at $17.43 (or at any price within the dreaded 10 percent band) is usually zero. Unfortunately, the stock price can’t adjust upward to balance buyers and sellers because no one has 1,000 shares to trade, and even if they did, few would want to sell as low as $17.43 plus 10 percent. Seasoned market observers estimate the true market clearing price of APD to be between $20.00 and $30.00. Instead, APD stock has been stuck at $17.43 for 59 weeks and counting, and daily trading in one of our most dynamic and successful Bahamian companies is pathetic.

In defending these restrictions, some large investors will trot out the tired trope that, if we removed them, “small shareholders needing money to pay for school fees or shopping trips will sell at any price and drive down the market valuation of our companies”. First, we should note that when the opposite happens – when market valuations are driven up on small trading volume – nary a complaint is heard. Second, although these large investors often mean well, we should nonetheless recognize how insulting this view is toward the small investor. It presupposes that large shareholders know much more about investing than small shareholders, and that some small shareholders are so flighty they will sell their shares at any price whenever there is a sale on at Kelly’s. Frankly, I wish this were true – I would love to meet such shareholders and buy their holdings. Sadly, I see very little evidence that they exist. For the sake of argument, however, let us suppose for a moment that after these restrictions are removed, a small investor really does reduce the price of Commonwealth Bank, for example, by 10, 15 or 20 percent in one trade. That shouldn’t bother the big timers one bit. After all, if they are such smart investors, they should know an undervalued stock when they see it and should be happy, not angry. They should (and in practice, will) put their money where their mouth is, buy the stock, and in so doing put upward pressure on the price. And, because daily closing prices are calculated on average weighted volume, the much larger trades of these investors will dwarf the small trade at the “wrong” price, and the end of day price will be much closer to that of the large trade than that of the small one. The “small and silly investor” excuse is nothing more than a financial boogeyman, and it is time we stopped believing in it.

With that concern behind us, we are now free to imagine a local stock exchange where prices change freely without restriction. The increased frequency of price changes increases the number of profitable buying and selling opportunities, attracting both big and small investors and increasing overall trading. Higher trading levels make it feasible for larger companies to list on the exchange and sell shares to the public, increasing public ownership in the economy as well as providing a needed exit strategy for shareholders of some of our oldest and largest businesses. The higher trading also attracts younger companies looking for expansion funding that would have otherwise turned to the banks, or self-funded, or simply failed. The increased number of companies, both big and small, young and mature, listed on the exchange attracts an even greater number of investors, and a virtuous cycle now takes on a vigorous life of its own.

We can start making this dream a reality simply by scrapping old rules that have not served us well. Shaunae Miller-Uibo, Chris Brown, Debbie Ferguson-McKenzie and others have shown that, in track and field, The Bahamas runs second to no one. The leaders at BISX have the opportunity to show that the same is true in the capital markets. The nation is watching.

 

– Jehan Unwala

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