Circuit filters: a neccessary evil?

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: The issue of circuit filters has once again surfaced to haunt he stock market community. Those who cheered at the removal of the first-day price band for stocks that are re-listed were caught on the wrong foot, when the shares of KGN Industries shot up to Rs 55,000 on May 21, turning its promoters to overnight billionaires. But neither the regulators nor the exchange did act. The next day, Sylph Technologies did a KGN. The company's shares, of which just around 2% are in the demat form, zoomed 99,900%.

Though the Bombay Stock Exchange (BSE) swung into action later, it was criticised for allowing the stocks to trade the next day as well. And this has brought up a question to the fore - the necessity of circuit filters on the first day of re-listing.

Earlier in 2007, Sebi had proposed a 20% circuit filter on the first day. However, Sebi in consultation with the market participants on issues of price discovery in the case of various corporate actions such as mergers, de-mergers, amalgamations, capital reduction, scheme of arrangement, revocation of suspension had come up with a circular on March 12, 2008, directing the stock exchanges to do away with the existing circuit filters for better price discovery of the stocks.

However, post the KGN and Sylph fiasco, Sebi had reportedly come down hard on the exchanges saying, "The practice of keeping the price band open for trading of scrips after evocation of the suspension is to enable the market to discover the price. However, the recent incidence of attempt to distort the price discovery of particular scrips is being viewed by the Sebi very seriously. The market regulator has asked the exchange to investigate and initiate appropriate action for such non-serious and frivolous market behaviour"

In a random survey by FE, market participants were divided over the need for a first-day circuit filter for re-listing. "There has to be a logical basis (for the stock price movement)," says Hasit Pandya, a stock broker. He feels that since around 80% of the stocks are not liquid, there needs to be some mechanism.

As of now, the logical basis can be created by only two options: either to have a circuit filter or not to have it. In the event of circuit filters to check manipulation, are there any viable tools for price discovery?