Will Sebi call auction rule curb rigging in illiquid shrs?

Moneycontrol Bureau

The new Sebi rule to have periodic call auction in illiquid stocks, instead of continuous trading, was the main reason for the sharp drop in cash market volumes on Monday, say brokers. The new rule came into effect from Monday, and according to a report in The Economic Times, around 2000 stocks were excluded from active trading since they did not fulfill the criteria for being liquid.

Sebi has defined an illiquid stock as one in which the average daily volume in a quarter is less than 10,000 shares, the average daily number of trades is less than 50, and the stock is classified as illiquid on the stock exchanges it is traded. All three conditions have to be met for the stock to be fall in the call auction category.

In normal market, buy and sell orders are placed on an ongoing basis during trading hours, and get executed if they match. In the call auction process, there will be auction sessions of one hour each throughout the trading hours with the first session starting at 9:30am. Of this one hour, 45 minutes shall be allowed for order entry, order modification and order cancellation, 8 minutes for order matching and trade confirmation and remaining 7 minutes shall be a buffer period. All unmatched orders remaining at the end of a call auction session will be cancelled.

Sebi's intent behind the move is curb price manipulation which more rampant in illiquid shares of small and midcap companies. The market is divided on the new rule. Some argue that this will trigger a reinforcing cycle as genuine investors will avoid illiquid stocks, worried of not getting a quick exit, and that will make the stocks even more illiquid. A better move would have been to identify stocks in which there are strong grounds to suspect manipulation, and then take stringent action against the offenders, they argue.

Also, as a report in the DNA points out, there are loopholes in the new rule. For instance, Westlife Development Ltd, owner of Hardcastle Restaurants, which operates the McDonald's restaurant chain, has escaped being classified as an illiquid stock, despite average daily trading volumes being less than 10 shares. That is because on March 22, over 6 lakh shares changed hands, boosting the daily average trading volume for the quarter.