CSE traders making hay while sun shines

The Colombo stock market's newbie traders actively backed by a few of their veteran counterparts are on a mission to make the most of punting illiquid stocks before the new index calculation method arrives next year.

Shares ended at record highs for most of this week after the

Colombo Stock

Exchange (CSE) announced that a free float-adjusted market cap weighting for its main ASPI (All Share

Price Index), seeking to eliminate the distorting effect of illiquid stocks will be introduced next year – possibly January.

This type of calculation for the main index was discussed over the past few months but the CSE took a stand to approve it when traders on social media were driving up prices and volatility on ASPI stocks with little free float and actual liquidity.

Some shares such as LOL C and Expolanka rose in price moving to strong earnings, analysts pointed out noting that some others going up in price did not make sense. “It is a simple matter of greed because when the demand increases in a limited supply of shares which is illiquid stocks, their prices increase. Traders are trying to make a quick buck and they want to get out of the illiquid stocks they have invested in before the good charm runs out,” an analyst said.

In another twist, stock market sources said that some heavy traders in illiquid stocks have been warned by the authorities and they are trying to get out of these positions as soon as they can before the calculation methodologic kicks in.

However, the issue is the big negative impact these shares have on the index, stockbrokers and stock market analysts point out. Currently, the ASPI reflects both voting and non-voting shares of listed companies and does not show the liquidity and actual tradability of each security, resulting in inconsistencies between prices on display and the actual prices experienced by the investors.

Ballooning the market through such illiquid share price hikes will not fetch genuine investors overall which should be the whole point, they said.

It is a simple matter of greed because when the demand increases in a limited supply of shares which is illiquid stocks, their prices increase