Price floor returns as stocks hit a 14-month low

Infographic: TBS

The Bangladesh Securities and Exchange Commission (BSEC) reintroduced the price floors for individual securities on Thursday to stop the market from going further down as the key index hit a 14-month low at 5,980.

The average closing price of Thursday and its four preceding sessions would be the floor price for individual scrips, the commission said in the afternoon.

That means, no scrip can be traded below the floor price.

However, the post-record date adjustments for stock dividends or right shares might lower the price floor, said the regulator.

For a newly listed security, the closing price of the first session will be the floor price.

The BSEC said in its order that the floor price, which is a temporary measure, would be effective immediately.

The commission had earlier imposed a similar floor pricing on 19 March 2020 while the DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), was falling freely from the 4,000 mark due to the Covid-19 fears.

Later, the regulator allowed post-record date adjustments to lower the floor and gradually lifted the floor price for some scrips and imposed a narrow bottom circuit breaker instead.

Finally, in June 2021, the floor pricing was completely withdrawn as the market had already shot up riding on a liquid money market and better than expected economic output during the pandemic.

After the withdrawal of the floor price in June 2021, DSEX continued its rally till October and soared to over 7,400 points.

But, profit booking from majority scrips amid the then bottoming out interest rates, global supply chain disruptions, and increasing costs of production triggered a correction in the stock market and over the last nine and a half months, the stock market only spiralled down.

The Ukraine war, global energy and commodity crisis, deteriorating exchange rate, and investigation findings regarding a large number of manipulated rallies in individual scrips over the mid-2020 to late-2021 period kept hurting the confidence of investors.

In March this year, the BSEC narrowed the bottom circuit breaker – the allowable limit of the price drop in a day – to 2% from the standard limit of up to 10%, while the regulator kept the upper circuit breaker unchanged at up to 10%.

When the protections – price floor and narrowed down bottom circuit – become of any use, the market lacks buyers at the artificially held price ranges.

As a result, both the floor pricing and narrowed down bottom circuit breaker turn into pains for investors who need to sell shares in the bourses, while a large number of retail investors cheer the protections as that helps stop their capital erosion temporarily.

The BSEC on 20 April this year widened the bottom circuit breaker to 5% and again made it 2% on 25 May as the market kept falling.

Too many changes in rules regarding price movement made a large number of investors puzzled and nothing worked to stop the market from falling.

Having some short-lived rallies followed by deeper declines, the DSEX hit 5,980 on Thursday failing all the BSEC moves — energising institutional investors and market manipulating high-net-worth individuals — to arrest the fall.

Also, the regulator's unconventional hard work of arranging international road shows, seminars, and country branding programs to attract foreign investors in the market did not work as foreign fund managers have been the net sellers in the bourses for years.

However, the reintroduced floor is going to be lower than Thursday's closing price for 27 scrips, the same for 37 scrips, and higher for the rest of the 382 DSE scrips, according to calculations by a top brokerage firm.