October 18, 2019

Good Things Happen, Because Bad Things Are Allowed To: Karachi Stock Exchange Version

Markets are going to be volatile, because that’s by design. If you curtail volatility, forcibly, it doesn’t end well.

Oh, and people have tried.

In Pakistan in 2008, they framed a rule: markets cannot go down. Meaning, stocks prices would have a lower bound, limited to the price of the previous day. You couldn’t bid the price down below that price. This was set by the SECP, the securities regulator of Pakistan.

This soothed some fears as the Karachi Stock Exchange index had already plunged from 15,000 to 9000, with a 15% drop in a week. If you don’t allow prices to go down further, then life would be so much better!

A strange thing happened. There were just no buyers for stocks. People wanted to buy, no doubt, but not at current prices. And without a buyer, there was nothing a seller could do but to place his orders at the lowest possible number – the high of the previous day.

Between September and December 2008, as the world was crashing and burning (the NSE Nifty fell about 40% in this period) the Karachi Index was at exactly the same level, because no one was willing to buy higher, and you were not allowed to sell lower.

When reality dawned, and apparently it took three months then, the authorities decided to remove the price “freeze”. Consequently the stock market dropped another 40% and only then stabilised and returned to go up more than 10x from the lows.

Read more at https://www.capitalmind.in/2019/10/good-things-happen-because-bad-things-are-allowed-to-karachi-stock-exchange-version/

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