Sun, Oct 26, 2008 - Page 8 News List

EDITORIAL: The downside to market intervention

Those paying attention to sales of public welfare lottery tickets may have noticed a surprising contrast between the dour mood among investors and the recent enthusiasm for lottery tickets. There seems to be plenty of hope for a one-in-a-million shot at a miracle, but little faith in volatile equities.

To address market concerns in the face of the global credit crisis, policymakers have temporarily halved the daily down-limit for trading of individual stocks from 7 percent to 3.5 percent. The tightened limit has been in place for two weeks and officials will decide today whether to extend it for another week.

The government has also banned short-selling stocks until Dec. 31 in the hope of rebuilding investor confidence and giving companies time to stabilize their sagging shares.

Owing to these temporary measures, the Taipei stock market has experienced a slower decline than its counterparts in Seoul and Singapore. But the effectiveness of these measures is still questionable: The TAIEX has continued steadily downward and has dropped more than New York, Japan, Shanghai and Hong Kong.

The restrictions have also produced side effects that have negatively impacted the market, in particular by exacerbating dwindling market liquidity. Never before has the stock market’s trading volume contracted at such a fast rate as in the past two weeks.

Taiwan Stock Exchange data indicate that average daily turnover fell to NT$42.08 billion (US$1.26 billion) last week, a drop of 17.5 percent from a week earlier and 36.2 percent from two weeks earlier. On Thursday, daily turnover hit a seven-year low at NT$26.36 billion.

The halved down-limit has doubtlessly helped keep drops in share prices at an artificially slow pace, but it has not had the effect of containing the overall bearish mood on the market.

More disturbingly, investors have been placing sell orders that have piled up day after day because of the limit.

In other words, since the market was unable to process the sales in a single trading day, more panicked investors lined up to sell the next day, which only reinforced the bearish sentiment. This will likely extend the market decline in Taiwan while markets abroad begin to recover.

As for the ban on short sales, it may have warded off manipulative moves to dump shares on a weak market, but this measure also squeezed market liquidity from short sellers and day traders now blocked from their hedging activities.

In addition, the short-selling ban has discouraged potential buyers from entering the market because it has become more difficult to gauge the true value of stocks.

With investors wary about picking up stocks that may turn out to be bad buys, policymakers need to rethink their interventionist approach to the market.

Although the market is likely to incur more losses once the restrictions expire, there will be a genuine price mechanism no longer distorted by intervention, which will attract more investors. After all, market liquidity is what counts.

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