Is reducing the fluctuation range the solution?/ How does the stock market reach equilibrium? – Tejarat News

According to Tejarat News, the stock market has started a rapid correction process since the middle of May. So that in only four trading days at the beginning of this process, 336 thousand units equivalent to 13.20% of the height of the total stock market index were reduced.

Conditions were even worse in the market’s weighted index, which is a more telling representation of the state of mid-cap and small-cap stocks. During the mentioned period, this indicator experienced 15.95% free fall. Therefore, during only 4 trading days, 139 thousand units were reduced from the height of the equivalent weight indicator of the glass hall.

The continuation of this trend over the past three and a half months has made the market people worried about the risks ahead. Therefore, in the recent days, the whispers of reducing the range of volatility among the people of the stock market became stronger. This issue was accompanied by the reaction of experts and the Stock Exchange and Securities Organization, and Amir Mehdi Sabai, the spokesperson of the Stock Exchange Organization, announced in a tweet: “Following the rumors raised in cyberspace, we inform the respected shareholders, there is no plan to reduce the range of volatility.”

Although the reduction of the range of fluctuation is rejected by the stock exchange organization at the current stage, but still, this option is always raised in the conditions of the continuous decline of the stock market. Based on this, the important question is whether reducing the fluctuation range will control the downward trend? Another question is that not reducing but eliminating the range of fluctuations will lead to the discharge of the selling wave?

Eliminate swing

Monitoring and controlling large fluctuations in the market is one of the duties of the capital market supervisory body in order to prevent the creation of unusual and unrealistic waves. Some believe that, along with advantages such as transparency and high liquidity, one of the advantages of the stock market is its controlled volatility.

On the other hand, some experts believe that the lack of fluctuation range in markets such as cryptocurrencies or cars will cause them to re-dynamic in a short period of time. For example, the image below shows the Bitcoin chart in the weekly timeframe. In the two specified boxes, Bitcoin has experienced heavy drops of 50 and 63 percent in two and four week intervals. After the selling waves have been exhausted, the price has started to move positively. But is this proposition always true?

It cannot be denied that in this example, the price of Bitcoin to the US dollar has also experienced periods of suffering or a long-term downward trend. In other words, the market trend has not always been in such a way that the selling wave quickly dissipates and the upward trend begins.

Past experience of reducing swing range

Changing the scope of the action by the market supervisory body, ie Stock Exchange and Securities Organizationwhich was done to support the shareholders and stop the process of real capital withdrawal from the market.

During the fall of 1999, in order to balance the stock market, the Supreme Council of the Stock Exchange decided to reduce the range of fluctuations on its negative side. In this way, from February 25, 1999, the range of stock market fluctuations changed from negative and positive five percent to negative two to positive 6 percent.

The history of changes in the range of the stock market volatility is given in the chart of the total index. As is clear, the market’s reaction to the change in the range of volatility has been extremely negative. In this way, after 25th of February 2019, the total index ended only two days with a green candle during three weeks. After that, on the 1st of May, the fluctuation range increased by one percent in the negative direction, the speed of correction increased and even a new floor was recorded for the total index.

Based on this review, it can be concluded that reducing the range of fluctuations cannot prevent the downward trend of the market, but it will reduce its speed. This issue, i.e. slowing down the trends, has its positive and negative points, but it seems that, in a case study, the negative points outweigh the positive. Because the erosion of trends is one of the consequences of reducing the fluctuation range. This issue can be frustrating for shareholders. It also increases the risk of yield reduction compared to other markets and the sleep of capital in an inflationary economy.

The end of rumors of swing range limitation

It seems that the supervisory body has avoided changing the fluctuation range in order to avoid repeating the previous experience. Other support measures, such as increasing market transparency (for example, preventing what happened on May 17 and some news rents), using stabilization fund resources, and better performance of market operators can support the stock market much more effectively than changing the range of volatility.

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