Dhaka bourse plans overhaul of market monitoring

Prevention of stock price manipulation and security of investments are must to ensure investors' fearless participation in the equity market.

Keeping that in mind, the new board of the Dhaka bourse has set out to contain unlawful activities that come in the way of market development, said DSE Chairman Mominul Islam in a telephonic interview with the FE.

"Like an infectious disease, insider trading has destroyed the investment ecosystem in the country's capital market," he said.

Insider trading is referred to as transactions of shares of a company by someone, who either is part of the business entity's decision-making body or has an access to it, to leverage confidential information. Such transactions influence prices of the stock involved.

Apart from companies' board members and those in the top management, officials of the securities regulator and stock exchanges have access to inside information because of the regulatory affairs linked to acceptance or rejection of any proposal made by the listed companies.

"The high-risk persons having access to inside information should be brought under an additional surveillance system so that their suspicious activities can be monitored," said Mr Islam.

Not all people under surveillance will be identified as guilty of wrongdoing, but if someone is caught with illegal acts, it will send out a warning to others against committing crimes.

Enforcing punishment is important to stop violation of the insider trading rules to ward off further violation, said the DSE chairman.

A new surveillance system

The DSE initially considered bringing at least managing directors, chief executive officers, chief financial officers, and chief technology officers of the issuer companies and stock exchanges under a surveillance mechanism.

The chairman laid importance on the introduction of latest technologies and real time responses from the TREC (trading right entitlement certificate) holders to make the initiative effective.

"We have continued consultations with other stock exchanges, including the Colombo Stock Exchange, to adopt strategies to contain insider trading," Islam said.

Redefining PSI

To avert stock price manipulations, the DSE is working to redefine the definition of price sensitive information (PSI).

Sometimes the stock exchanges post information on their web portals, provided by the issuer companies, such as the signing of a memorandum of understanding (MoU) between the company and other parties. A MoU is not a deal and it should not be deemed as PSI, said the chief of the prime bourse, but such information leaves an impact on the stock price.

"So, we need to categorise pieces of information and decide which of those are PSI or which are not," said Mr. Islam.

Any pre-matured decision of an issuer company is at risk of being revised or scrapped altogether. But such decisions are leaked by insiders to influence stock prices.

Stock brokers have lodged complaints with the DSE board that such information is leaked through different platforms.

Fraudsters also take big positions in listed companies to artificially increase stocks' prices.

The DSE chairman said the persons having involvement in the market monitoring should be made accountable to stop manipulations in the secondary market.

"We also need to decide the limit to which the officials concerned should have access to information and at the same time secure lawful transactions by investors."

Protection of investors' funds

Protection of investors' funds is another big challenge for the stock exchange. Many rogue stock brokers have embezzled their clients' funds from the consolidated customers' accounts (CCA).

The securities regulator has recently asked the stock brokers to submit their CCAs' balances to the stock exchanges on a daily basis.

The DSE chairman said many stock brokers are reluctant to comply with the instruction as it is difficult for them to send information on a daily basis. It would be easy to obtain a stock broker's transaction-related information from the bank with which the broker opened the CCA.

"The exchange will make deals with the banks so that they inform the exchange of any abnormal or suspicious change in stock brokers' balances," Mr Islam said, adding that the role of the depository authority should also be expanded for the purpose of preventing unauthorised sales of clients' shares by stock brokers.

He has also emphasized the need for transparency in the execution of regulatory orders, referring to instances when there were temporary suspensions of orders in the interest of vested quarters. There were unofficial instructions too from the securities regulator.

"We need clear directions -- in black and white -- from the securities regulator in executing different [regulatory] decisions."

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