Circuit filters: a neccessary evil?

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: session for price discovery. One instance in the past is the special session to discover the price of Reliance Industries' stock, after the company was demerged, in 2006. The price band for the next day onwards can be based on the overall indication arrived at the special session. A volume-weighted average price of the stock at this session can be worked as a basis for commencing the real trade. But when it comes to the Z category stocks, there is a lack of wherewithal to go for such a mock trade every time, since most of them are small stocks. "There can be dummy filters in the case of small-caps. Our market is still in a state of evolution. There is a huge possibility of operators manipulating the stock on the first day of re-listing. So circuit filters in general are a necessity," says Dinesh Thakkar, chairman of Angel Broking. The filters are there to protect the interests of investors, he said.

The debate on daily price limits in financial markets came up in the aftermath of the crashes of 1987 and 1989. The New York Stock Exchange and the Chicago Mercantile Exchange introduced circuit breakers that would halt trading for a certain time-period in case the indices go beyond a level in a day.

If circuit filters are indispensable, how will the stock find its real value without which the investor stands to lose? Some experts believe that circuit filter is an indispensable tool to check manipulation, but it will not prevent price discovery. A stock can discover its true price over a few trading sessions, they said. Others have a different view.

The price at which the stock was trading when it was last traded will be in most cases too low. In the case of Sylph Technologies, it commanded just 80 paise when it was delisted more than seven years ago. "A company may have been delisted for various reasons. What change it has undergone fundamentally is the basic question," said Pandya.

BSE adds, "While some companies may have improved fundamentally and financially, there may be companies, which may not have any such improvement in their business activity to support the significant price rise. The investing public is requested to note the quality of companies, especially the group in which the scrip is placed at the exchange before dealing in such scrips."