IDX to Remove the Lower Limit of 10%?

This week there are many announcements saying the Indonesia Stock Exchange (IDX) will set up the trading rule of symmetrical auto rejection (AR), from the current asymmetric. The announcements spread as The Director of Transaction Monitoring and Obedience, Hamdi Hassyarbaini, said to the reporters on August 30^th that since the Indonesian stock market has become stable as Jakarta Composite Index (JCI) rose significantly, it does not need to apply the asymmetric AR rule anymore. Now, you might be wondering, what is symmetrical AR? What is asymmetric AR?

Then here it is. One year ago, on August 25^th 2015, or one day before JCI had a panic selling and fell 4% in a day, the IDX immediately acted by launching four new rules at once, such as: 1. The issuers were allowed to buy their own shares (buy back) without Annual General Meeting (Rapat Umum Pemegang Saham, RUPS), 2. Any stocks might only fall a maximum 10% a day, 3. The Investor Protection Fund (Dana Perlindungan Investor) which is managed by PT Penyelenggara Program Perlindungan Investor Efek Indonesia (P3IEI), was increased from Rp25 million to Rp100 million, and 4. The brokers were prohibited to do short-selling transaction. Those policies were aimed that JCI, after it crashed from 5,500’s to 4,100’s, could recover as soon as possible, or at least not fall further.

And if you notice, the most interesting was rule number 2, any stocks might only fall a maximum 10% a day, that if someone executed bid or offer price lower than the limit 10%, then it would be rejected automatically by the system (auto reject). Previously, the rule mentioned the stock with price Rp50 – 200 could rise or fall maximum 35% a day, meanwhile the price 200 – 5,000 could rise or fall maximum 25% in a day, and the price above 5,000 could rise or fall a maximum 20% in a day.

The rule where a stock has the same increasing and decreasing limit (for example stock A’s price is Rp100, then it can rise a maximum 35% and fall 35%, in one day), it is called symmetrical AR. After 25^th August 2015, a stock could climb maximum 35%, but it could only fall maximum 10%. When the increasing limit is different with the decreasing limit, it is called asymmetric AR.

Note: for investors and traders, if a stock falls 10% in a day, then it is called left AR, or lower AR. But if a stock rises 20%, 25%, or 35% (depend on its market price), then it is called right AR, or upper AR.

In a swinging market, the rule where a stock can only fall maximum 10% in a day is expected to hold JCI to not fall below the position which does not reflect the economic fundamental and the company performance, because if that was the case such (JCI falls too deep) then panic selling will follows, eliminating the investors’ trusts towards IDX and the stock investment itself. One of the worst cases was, in October 2008, JCI fell 20% in only three trading days, and subsequently the market took a long time to recover, in which the stock transaction value in IDX became normal (read: as normal as before JCI crashed) at the beginning of 2012. If JCI on October 2008, although it fell, if it had not fallen horribly, it would have recovered faster, investors would have engaged in the market, and the brokers would not have stayed in their house for a long time as the trading got busier.

However, in a normal and stable market condition, the rule of maximum decrement of 10% causes the movement of certain stocks do not reflect the fundamental of the companies. Because when JCI rises there will always ‘bad stocks’ which normally may fall below 30%, but it will not happen because of the limit of 10%. The point is this rule creates a silly impression that ‘any stock may go up, but not go down’. In addition to this rule, although it is favourable for investors and traders, it is less favourable for the securities/brokers and IDX, because if a stock falls 10% in a day then the cycle stops, transaction for that day will not occur, and the income from trading fee for the brokers (and IDX as the regulator, remember the security as a stock exchange member has to pay a portion of its trading fee income to IDX and other SRO’s) reduces.

It might be the possible reason, on August 30^th Mr. Hamdi stated that IDX was reviewing some trading regulations, including IDX would implement a symmetrical AR regulation, in which a stock could rise or fall as much as 35% in one day. But it might be the reporter miswrote the statement (then the security analysts cited it then published their analysis’, it was a mess indeed!), the public assumed the statement that, ‘BEI will remove the lower limit of 10% on September 1^st!’, but Mr. Hamdi did not say anything about September 1^st! And IDX has not announced yet the new regulation regarding auto reject. When Mr. Hamdi said IDX was evaluating the new rule to remove the minimum price limit Rp50 (to make a stock could fall to maximum Rp0), it was still a review, not an official rule to remove the minimum price limit Rp50.

(but misinformation usually occurred because Mr. Hamdi was just plain blinded by the reporters, or in other words, Mr. Hamdi would not have said it If he had not been asked. If I were Mr. Tito, I would hold a special training for IDX directors to be careful in giving statements to the media as, you know, today’s journalist will write any news hurriedly)

But fortunately one day later, on August 31^st, IDX clarified that it would not implement symmetrical AR on September 1^st, and the lower limit of 10% would be valid until an undetermined time.

But, let us wondering: If the IDX removes the lower limit of 10%, so a stock can fall 35% in one day, what will happen? Certainly, the stock market gets busier! The last time I saw JCI crashing was in trading days after Chinese New Year holidays on October 2011, JCI fell 8.88% in one day (when JCI had a panic selling on 2015, trust me, it was nothing). But I do not believe if IDX has a courage to implement it because now the investors are more sensitive, because information spread faster due to the internet, stock group/forum, and social media, if JCI drops 2% in a day then people become panic, and the fear spreads to other investors because of social media, then panic selling will occur. In addition, even with the limit of 10% rule, it does not prevent certain shares to not crash, such as Bank Pundi (BEKS) or Bank CIMB Niaga (BNGA), although it can only fall 10% in one day, then it can drop 10% again in the next day, and so on. As you can see, the condition may get worse if the stocks are allowed to fall 35% in a day.

While the idea about taking away the minimum price limit of Rp50, well, I do not comment on it. But if we use the benchmark of the American Stock Exchange, then certain stocks, if their fundamentals are bad, they may fall to 1 cent or US$ 0.01, or even zero Dollar, if a stock does not rise it will be expelled from the stock exchange (delisting). So, I do not know if the same rule will be applied here, a stock may fall to Rp0, but honestly, I am curious about what will happen if the rule is implemented.. Well, what do you think?

Original article was written (in Indonesian Language) in September 6, 2016. For inquiries, please contact the author by email teguh.idx@gmail.com