Any Place Money Can Be Created, the State Is In A Hurry To Intervene

4-5 years ago nobody was truly interested in the stock exchange – neither the state, nor the investors. If, by default, anybody got interested and decided to invest money, in most of the cases he used to lose the invested money. The state, on its behalf, had created the rules of the game, had assigned rights and responsibilities between the participating institutions, and exerted control as far as the state had set by itself. On behalf of the stock market, the Commission for financial supervision (till March 2003 the regulation was done by the State commission for treasuries) and the Central depository (CD) used to supervise the process and did not consider it important to try to ‘improve'[1]the functions of the market. And everything was just fine – the growth of the economy brought in more companies listed on the stock exchange, more investors and the market started generating profits.

Going back one year from today, the indices SOFIX and BG40 went up with approximately 45% and 88%, respectively. For 2006 this increase was even higher. Even though the cited indices reflect just a part of the market and in reality a lot of information is ignored, they are good indicators for the ongoing mood. And the mood is the following – the market is attractive and works fine, brings profits, and it is a preferable place to invest for greater number of people and organizations. This signifies that besides the growth of the economy and the better perspectives for investment (in the general case the engine of financial development is the real economy), the rules of the game are reasonable, they guarantee, to a satisfactory degree, the basic principles of property and individual responsibility. With the exception of some bureaucracy and delays by the participating institutions such as the Central depository, the flows of capital move fast, the companies, the investors and the intermediaries are satisfied.

If something works fine, before changing it, please check out if it will not goes worse

Few days ago an amendment in the rules of the stock exchange has been introduced. According to it, transactions, which are already concluded, can be revoked, if they are ‘a result of unquestionable mistakes done by the brokers". What does this mean in practice? For example, if a ‘sell' order appears for 10 000 shares at a price of 5 leva per share, given that the average price is 10 leva, then the transaction shall happen and besides, the one who managed to buy first at 5 leva and sell at 10 leva, shall make a profit of 50 000 leva. If the ‘sell' order sent by the owner of the shares was indeed for 5 leva, the owner would lose money, because he could have received higher price, 10 leva for example. But if the ‘sell' order sent by the owner had been for 10 leva, not 5, but the broker for some reason misunderstood it and set a price of 5 leva per share, then obviously it is the broker's fault. The most logical path is that the company, owning the shares, and the broker just endure the consequences, in this case the loss of 50 000 leva ( then the company may decide to sanction its employee). This is the component of ‘individual responsibility', without which not a single market can function properly.

On the other side – the investor who managed to buy first the offered shares at lower price is at profit. The shares will be his (after the process of transferring in the Central depository), because he had paid the required sum of money for them. This is the component of ‘property rights'.

The amendment in the set of rules of the stock exchange is a severe violation of both principles. The possible revocation of the transaction will not allow for the one who had made the mistake to bear the responsibility- a bad example, both in the sphere of economics and many other spheres in life. The profession of the broker should not be distinguished from any other profession. When a mistake is made, there should be someone responsible for it! What would happen if the state starts to revoke consequences, which are results from actions or inactions (whenever this is possible)[2]?

On the other side- the investor who has bought the shares should bring them back. In other words, he has to bring back something which is already his property and has been acquired in absolutely legal way. It is obvious that not the sole acquisition, but the compulsion to do so, has illegitimate character.

How this new change in the rules will contribute to the faster and better functioning of the stock exchange- not a bit!

How the new change will aggravate the rules of the game and the efficiency of the market- in many ways:

  • o the brokers can afford to be more lax, without worrying too much to make mistakes (imagine if the surgeons have similar way of thinking!);
  • o if a mistake is allowed and making this mistake is unpunished, it can become a common practice;
  • o what gets the one who was the fastest and the smartest? Nothing! On top of that, he will suffer monetary losses connected with the transfer of the shares and many others;
  • o if there appear spontaneously orders which prices deviate with more than the standard deviation of the ongoing market price, how will the participants be sure that this is not a mistake? The stock exchange will become less secure and less dynamic;
  • o the orders for lower or higher prices, which subsequently are deemed ‘wrong', will exhibit disturbing effects for the market . This will cause embarrassment and reconsideration of the expectations, due not to changes in the economic environment, but just a misleading situation.
  • o If there is no possibility for invalidation of the performed transactions, the ‘wrong' prices will appear very rarely, if at all, because they will be sanctioned. The newly introduced change will give floor for a great increase in the number of mistakes.


[1] The introduced idea is connected with the common (mis)understanding in Bulgaria as well as in other parts of the European Union, for the functions and capabilities of the market and the attempts to be cultivated with the sole purpose the free competition to be replaced with ‘efficient' one. Even though the last term is empty of meaning, it has no scientific definition and is unquantifiable, unfortunately it is of great use in the European lawmaking (and in the Bulgarian as well).

[2] It is another question that it is impossible to know when something is on purpose and when not. In addition, the discretionary power of the decision-makers will for sure bring around other negative sides such as corruption.

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