‘Irrational forces’ in the market says CMMB boss

"You see, when a transaction involving ten shares can move the price of RBL down $2 in a session, the objectives for a timely intervention into the workings of the Stock Market become easy to identify," said Robert Mayers, at a CMMB business forum last week at the Hilton Trinidad. He noted the dynamics of the market suggest that expectation of price changes rather than the actual prices is what is driving decisions. He said when this happens, "irrational forces" in the market cause prices to drift away from fundamental levels. But the market eventually picks sense from nonsense, forcing a correction, he said, adding, "this is the stuff of which volatility is made."

He said some market actors tend to be overconfident in their predictions, noting they tend to overweight good news and overlook bad news about their investments, not wanting to be wrong about their projections. He warned that such optimism is primarily responsible for the phenomenon called "market bubbles," adding, "these bubbles do burst and asset values evaporate into thin air."

Stressing that proper regulation of the markets is critical, he called for mechanisms "to calm excessive fluctuations in the market."

"Clearly there is a need to develop a legal framework with effective administration systems that will separate short-term speculation from genuine investment," he told guests. Noting that the role of the Stock Exchange was to increase the quantity of funds available to finance industry and to direct the flow of new savings towards investment, Mayers said he raised its economic function to point out how "grossly underutilised" this aspect has been for companies in TT. He said this phenomenon manifests itself in the largely unequal and highly skewed distribution of debt and equity financing in the capital structures of local companies. He dismissed the argument that introduction of the electronic trading platform brought volatility to the market, saying the volatility was due to traders attempting to trade in the old-fashioned way (auction) on the new platform.