Chaos broke out at the Tehran Stock Exchange on January 21 as news emerged that the market’s index had fallen into further decline. Investors, alarmed by the falling index, rushed to the floor to sell their shares — and then to voice their dissatisfaction and frustration. Amid the shouting and broken glass — several traders smashed glasses on the floor in protest — investors demanded the government take action, and many called for the resignation of the head of Tehran’s Securities and Exchange Organization. The market was in danger of collapse, they said, and their investments were at risk. Someone had to do something.

In less than three months, the Tehran Stock Exchange Index has fallen by 15 percent, from 76,850 in October to 65,055 as of January 21. Shifts in prices mean a reduction in the value of stocks and, over the last weeks, smaller investors have been holding their breath, watching as their life savings diminish. They too want the government to intervene, and told reporters that many of them had invested in stocks because the government had encouraged them to do so, implying it was a viable and safe way to plan for the future. As a result, many said they expected the government to compensate for their losses.

But are these investors really victims? Or they looking for a scapegoat, and a way out of the bad decisions they have made? Due to ongoing government intervention, misinformation and high levels of corruption, activity in Iran's stock exchange activity is distorted and extremely volatile. Despite this, Iran’s economy cannot do without it: privatization initiatives and all major stock exchanges rely on the Tehran Stock Exchange (TSE).

For investors and traders, one thing is clear: when it comes to the TSE, how authorities behave matters. But how the government reacts cannot wholly influence the TSE: market forces create their own momentum, and their own risks, and those in the habit of thinking that the government is stronger than these realities is mistaken.

But Iranian officials have not tried to dissuade traders — and the public — from this misplaced trust. Despite their inherent inability to combat market forces, Iranian authorities continue to make promises they can never honor. Though investors must take responsibility for their actions, Iranian authorities have taken no measures to educate the population about potential risks.

Economists everywhere agree that risk and investment go hand in hand. Peyman, a financial analyst who has worked on Wall Street, told IranWire what all analysts know: “No one can guarantee the return of an investment in the market”. From his perspective, it is particularly important to keep risk in mind when trading at the TSE, which is a good example of what economists call a “short run, high return, high risk investment.”

“In Tehran,” says Peyman, “having access to privileged information is essential in guaranteeing one’s financial success,” directly acknowledging that it is a corrupt, non-transparent environment. Inside trading is illegal in most stock markets, but in Iran, it happens almost without mention, and it certainly does not come up against any opposition.

During the Global Financial Crisis of 2007-2008, Peyman met dozens of individuals who had lost their savings and investment in the Iranian market. At the time, he recalls how investors blamed the market and “corporate America,” but really, he says, they must have known they were responsible. “Even in the largest economy in the world no one comes to the rescue to compensate traders’ and shareholders’ losses,” he said. From his perspective, Iranian investors have repeatedly and significantly underestimated the risk of investing in stocks.

Fereydoun, a 45-year-old certified accountant and a veteran trader in the TSE, agrees with Peyman’s assessment. “Investors believe the TSE authorities change the index as they wish,” he says. In investors’ minds, any change in stock prices and in the market index is the result of interactions between politicians and other decision-makers. Essentially, they do not believe in market forces, and praise the work of authorities, who they believe to have brought about an increase in the index, and, as a result, the value of their investments. If the index goes down, the market authorities are to blame and are the ones that should be held accountable. “Small time investors do not believe the business environment and macroeconomic conditions influence the market,” says Fereydoun. “For them, the government and those who oversee the market are the ultimate authority in deciding prices.”

In reality, there are many factors damaging the TSE index and the health of trade in Iran. Falling oil prices, anti-inflation policies and internationally-imposed sanctions have changed the investment landscape. Many investors do not expect their investments to produce the return they would have liked.

The January 21 protest began with long lines, sellers trying to shift their stock before they endured even greater losses. But these investors were oblivious to the fact that, as they offered up their shares for sale, it has a knock-on effect: the market begins to experience supply surplus. If a market has more sellers than buyers, stock prices will plummet even further. So the decision to sell en masse accelerated the market’s tumble. And then, when they could not sell shares at the desired prices, they demanded the resignation of Qalibaf Asl, head of Tehran’s Securities and Exchange Organization (SEO).

Even though Asl is not to blame for the shift in Iran’s macroeconomic conditions, the previous conduct of Tehran’s SEO in leaves much to be desired. The TSE resumed in 1988 after a decade of inactivity. Since it began trading, the TSE has suffered from manipulation and interference from the authorities, who have managed to create a series of crises. Tehran’s SEO ran the market according to the government’s policies and intentions, dismissing market standards. Each crisis had its own group of losers; but those who gained were often the same people. Soon, market volatility threatened the very existence of the TSE.

But before its resurrection back in 1997, Tehran’s SEO required business and corporations operating within the TSE to report their activities and publish their financial reports on a regular basis. The SEO also monitored changes in stock prices closely. The monitoring was so rigid that at the end of each trading day, some prices were adjusted by artificial trading between investment companies to reflect a limited vacillation in the price. In order to maintain these artificial dealings to keep stock prices stable, Tehran’s SEO relied — and continues to rely — on Iran’s public and semi-private banks and investment institutions.

These entities often intervened to purchase supplied stocks to keep the index stable. It helped that their board members happened to be members of different regulatory bodies and policy-making councils. Traders in the TSE soon began to refer to them as “Hoghooghi-ha” or “the legal ones” because of their corporate nature. They kept the market stable. Seasoned trader Fereydoun worked for these entities at the beginning of his career. “For them, trading was a politically-motivated process and not based on an economic rationale,” he says. And by doing this, these companies gave investors the impression that a safety net was in place at the TSE.

On January 21, investors asked the “legal ones” to take action, as well as the government. They expected them to buy their shares. But the fact is that diminishing oil revenues have reduced the public banks’ ability to intervene in the market. Tehran’s SEO officials and  government authorities have no oil money; they have nothing to spare. No one, it seems, has the funds to give the TSE index an artificial boost. The TSE has begun a transition to a new equilibrium, one reflecting the new realities and the true levels of productivity and profitability in Iran’s economy.

As a result, Iranian investors have had a difficult awakening, forced to face the reality of Iran’s economy without any government support. They are beginning to realize that, when it comes to making investment decisions, they cannot rely on the authorities. January 21’s news — and the uproar that followed — will no doubt stick in the minds of traders. It was day of expensive lessons, but very necessary ones.

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