THE KSE IS NOW AT PAR WITH REGIONAL MARKETS

Computerized trading will go a long way in improving client-broker relationships

Khurram Baig
Nov 03 - 09, 1997

Sirajuddin Cassim is one of the most prominent members of the Karachi Stock Exchange. He has one of the cleanest slates and has managed to keep himself away from any kind of scandal in a market that is full of minor and major scams. A former president of the KSE, PAGE talked to him about his views on the recent modernization of the KSE, particularly the Karachi Automated Trading System, (KATS).

The KATS is now fully operational and each and every scrip trades on it daily in the afternoon session. In the morning session, scrips are traded by open outcry but the ten most active scrips, namely, PTCL, Hub Power, ICI, FFC Jordan, Dewan Salman Fibre, Dhan Fibre, Japan Power, KESC, MCB and Askari Bank are traded on the KATS. PAGE talks to Siraj Cassim about the impact of the KATS on the market.

Sirajuddin Cassim said that the most important benefit of KATS will be transparency and efficiency because the open outcry system has a number of flaws which will now be removed. He said that the delay in the execution of orders especially during times when the market is very volatile and the rate is changing rapidly, can cause a lot of ill feeling between brokers and their clients. This can be explained very simply. If a client gives a sell order, and the order is executed, but the closing price of the day is higher, the client might complain that the broker has ripped him off. Similarly if the client places a buy and the closing price is much lower, the client can once again feel cheated. This is not necessarily always the case but with the installation of the KATS and with its coming on line, these misunderstandings which often threaten client-broker relationships will be greatly reduced. Siraj Cassim believes that while there are a number of other benefits, this is a major positive impact as it will encourage investors to come in and put them at ease.

The reason this will be reduced is that in the open outcry system, even if the member were to immediately intimate his agent in the ring of an order, execution is sure to take some time. When the agent shouts out the order, he may not get an immediate response, or he may not get the price he wants. By the time he is able to execute the order and inform the member, the price may have moved. In most cases it is seen that if after a sell, the price goes down, the client takes the credit for a great call, but if the opposite happens then the broker gets blamed for misquoting the rate to the client.

Now with the KATS, there will be very little room for doubt, the member will be able to prove to the client that he had entered his order as soon as he received his call and will also be able to show him the time at which the order was executed and the market rate at the time. Hence the room for doubt is reduced, it is not eliminated but reduced.

He says that this building of confidence is vital to the future of the capital market. Siraj Cassim also said that with more and more exposure to foreign clients this modernization which has now put the KSE at par with other regional exchanges was very important. Both the CDC and the KATS combined will enable larger volumes to be traded in one day and then the settlement of the same will also be possible in a quicker and more efficient manner.

Front-running is one of the major sources of profits for a large number of the members at the KSE. They might protest that this is not the case but there are many who admit that a large number of members are guilty of this unethical practice which borders on the criminal if we were to take insider trading laws seriously. Siraj Cassim said that KATS will not be able to completely do away with front running but because all the deals and rates will be visible to the client on a real time basis, it will become harder to commit and easier to detect.

Another major impact according to Siraj Cassim is that the KATS will make it possible to trade a much larger number of scrips which would otherwise not ever be traded because of illiquidity or other reasons. With the KATS , the bid or offer can be posted and as soon as a match is made, be it in days or weeks a deal can be struck. This will especially benefit a large number of small investors who are stuck with dead scrips. They now have at least a slim hope of getting rid of some unwanted paper.

Regarding the acceptance of the KATS, Siraj Cassim said that brokers who are interested in legitimate business only have welcomed the KATS, and it is only those who wish to indulge in speculative activities, front-running etc. are reluctant to shift to the new system.

However, they have no choice.