The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

BISX’s chief executive yesterday slammed a financial analyst’s remedies for illiquid stocks as “misdirected” and “counterproductive”, suggesting some would “frustrate the market”.

Keith Davies told Tribune Business that while Richard Coulson’s “heart is in the right place”, and concern for investors “genuine”, his de-listing recommendation was “counter-productive” and did not understand how the Bahamas International Securities Exchange (BISX) and wider capital markets operated.

Mr Davies was responding after Mr Coulson sent a ‘memorandum’ to industry regulator, the Securities Commission of the Bahamas, containing proposals for dealing with illiquid BISX-listed stocks where long-term trading activity has ceased.

The November 20 document, seen by Tribune Business, cited two stocks in particular - the Bahamas Property Fund and Premier Commercial Real Estate Investment Corporation. The former has not traded for more than a year, with the last activity occurring in October 2016, while the latter has been dormant for five years.

Mr Coulson, a well-known and respected financial analyst, focused on the Bahamas Property Fund, the real estate investment trust (REIT) that owns the Bahamas Financial Centre; Paradise Island’s One Marina Drive; and the PricewaterhouseCoopers (PwC) headquarters building, Providence House. He suggested that many of the Fund’s 60-plus shareholders “would like to find an exit route but are unable to sell their shares”, blaming this on BISX rules that prevented potential buyers and sellers from agreeing “a reasonable price” at which to trade.

“BISX records show that 26 shareholders have placed unfilled sell orders for over 200,000 shares against zero buy orders,” Mr Coulson told the Securities Commission, “and there are doubtless other shareholders who want to sell but have not placed orders.

“Many of these sell orders were placed at $9.09 simply because that was the price of the last sale over one year ago. Other orders were placed at various prices down to $8.19, but still no buyers were found. As I understand BISX trading rules, no deals below $8.19 are permitted - even between a willing buyer and seller - because that would be more than 10 per cent below the last sale price of $9.09.

“In other words, a technical rule is allowed to block the sensible process of buyers and sellers finding a mutually acceptable price, the basic purpose of any stock exchange. Instead of encouraging trading, BISX prevents it.”

The unfilled sell orders are collectively worth $2.048 million, with the financial analyst suggesting the Bahamas Property Fund has become “unpopular with investors” because it is not currently paying dividends. Stubborn vacancy rates at the Bahamas Financial Centre and One Marina Drive, together with a lack of acquisitions/growth opportunities, have also impacted the stock.

To remedy the situation, Mr Coulson argued that BISX should drop the ‘10 per cent rule’ - which prevents stocks trading at prices more than 10 per cent higher or lower than the previous day’s close - for stocks such as the Bahamas Property Fund.

He called on the Fund’s administrator, RoyalFidelity Merchant Bank & Trust, to request such a move by BISX, arguing that this would enable sellers to ‘exit’ by agreeing an acceptable price for their shares with buyers.

If the ‘10 per cent rule’ was not waived, Mr Coulson told the Securities Commission that the Bahamas Property Fund “should simply be de-listed from BISX” due to lack of trading activity.

“Although BISX does not seem to have any specific rule regarding de-listing, the Jamaica Stock Exchange has a rule providing that if any share is suspended from trading for more than 180 days it is automatically de-listed,” Mr Coulson said.

“I understand that the Bahamas Property Fund has a small number of large investors who take the long-term view and do not wish to sell. If so, they should be interested in buying more shares at a bargain price that would be allowed if Bahamas Property Fund were de-listed.”

He added: “Many shareholders are angry that the daily BISX quotations, and their own brokerage statements, carry Bahamas Property Fund shares at a current ‘market value’ of $9.09. Since this is a long out-dated figure with no basis in present reality, they consider it to be seriously misleading....

“In summary, the Commission should exercise its regulatory powers to compel BISX and Fidelity to take the steps outlined above, fulfilling its duty to protect the interests of shareholders.”

But Mr Davies, who had also received Mr Coulson’s memorandum, told Tribune Business that the financial analyst was focusing on the wrong ‘target’ in respect of the ‘10 per cent rule’.

He said his concerns should instead be addressed to BISX’s broker/dealer members, such as RoyalFidelity and CFAL, who had the responsibility of “alerting” BISX whenever market indicators suggested a particular stock’s 10 per cent ‘band’ needed to be moved.

However, Mr Davies conceded that the exchange was currently in talks with the broker/dealers over how the ‘10 per cent band’ should move in response to market activity.

The BISX chief executive also challenged the need to force a company to de-list, due to lack of trading activity, if it was in full compliance with the exchange’s rules and listing obligations.

Forcing a company to ‘go private’, Mr Davies argued, would be “counter-productive” since it would no longer be obligated to make public disclosures that investors rely on to determine trading prices.

“I don’t want to beat up on Mr Coulson, as his heart’s in the right place, but you’ve got to get your facts straight,” Mr Davies told Tribune Business. “His thrust is genuine in terms of providing investors with options on how they can trade, but sometimes Mr Coulson doesn’t understand the operations of the exchange or how the market operates. 

“I wish he would take the time to simply ask. I think his focus is misdirected or misguided. Trading is conducted by broker/dealer members. We are the highway upon which they ride. To the extent someone wants to buy or sell outside the 10 per cent band, we are guided by our members.

“If there are orders proposed or pending outside the band, they would alert us and ask us to move the band. In most instances, very rarely would we object, and the band would move. The misperception is that he [Mr Coulson] may have an argument with the band, but the band is not static,” the BISX chief executive continued.

“We do set the band, but we are able to increase or lower it based on market indicators. There has to be someone in the market saying: This is here, we’d like it to be there. We anticipate that it can expand based on movement of the market.”

Still, Mr Davies said BISX was “in the process of talking to members on how bands should move in response to market inactivity as well as market indicators”, suggesting that Mr Coulson’s criticism is not entirely misplaced and that there is room for improvement.

Illiquidity, or lack of willingness by buyers and sellers to trade and interact, has plagued BISX and the wider capital markets since the stock market’s creation in 2000. Partly a function of the Bahamas’ relatively small market size and exchange control regime, it also stems from the fact that most institutional investors tend to ‘buy and hold’ rather than engage in active trading.

Mr Coulson and others have called on the broker/dealers to act as ‘market makers’, and provide liquidity by using their own money to ‘mop up’ surplus ‘buy’ or ‘sell’ orders, but this has yet to occur.

The market’s illiquidity also drove imposition of the ‘10 per cent’ rule, which was intended to prevent wild fluctuations in stock prices caused by small retail investors exiting at values that did not reflect a company’s fundamentals. Often, these trades involved just a few hundred shares.

Mr Davies, meanwhile, also railed at Mr Coulson’s suggestion that inactive BISX-listed stocks should be forced to de-list. “As long as a company is complying with its regulatory regime, there is no need to go after the company and de-list it,” he told Tribune Business.

“It removes access to continuing disclosures. To the extent there is trading or potential trading, it removes the information people need to make the informed decisions he’s complaining about now.

“You end up frustrating the market. If someone wants to trade, where do they go? Who are they talking to? What’s a realistic price? What are the indicators It’s counterproductive. There needs to be full understanding of how the market works, and speaking to these principles rather than knee-jerk reactions.”

Mr Davies reiterated that BISX was merely a facilitator and platform for the wider capital markets, and added: “We are the highway. The speed at which you travel on that highway is totally up to you. We can accommodate one mile per hour or one million miles per hour. It doesn’t matter.”