The need for better self-regulatory system
SECP must also keep a watch on erring brokers
By SHABBIR H. KAZMI
Sep 20 - 26, 1999
Trading volumes and index movement at Karachi Stock Exchange (KSE) has
been directionless for quite some time. Bulk of the buying continued to come from
institutions, which make selective purchases at dips. Large retail investors remained
entangled in payment issue, causing general speculation about another bout of distress
sales. Falling retail activity has taken a major toll on volumes which came down by 30 to
40 per cent since August. With much of the speculation gone, prices are again becoming
range-bound and also drifting downwards. Most players are wondering which segment of
investors will give a fresh push to the market. This uncertainty is pushing many investors
to the sidelines, forcing them to adopt a wait and see approach.
While many analysts subscribe to the above mentioned point of view,
some analysts say that local market is not efficient. They say that technically the flow
of information disseminated to all participants should be around the same time. However,
some select groups have access to inside information. These groups have also emerged to be
big retail investors and market is led by them. These analysts even go to the extent of
saying that had there been an active participation by foreign investors the surges would
have not been there.
The market efficiency had improved a lot with the emergence of research
sections in almost all the brokerage houses. However, these groups, having inside
information, have bulldozed the efforts of these brokerage houses. These large-scale
retail investors are the key players at Lahore and Islamabad and also make purchases
through their selected brokers from Karachi. The level of their holding can be gauged from
a fact that they recently bought 25 to 30 million shares of Fauji Fertilizer, besides
purchasing large number of shares of other blue chip companies.
It is said that some of these businessmen were originally from Karachi
and have shifted their base to Faisalabad, Lahore and Islamabad now. They have entered
into equities trading lately as they enjoy ample and low cost funding from commercial
banks. These groups also have contacts in Islamabad and managed to get inside information
rather easily. It was also said that they are actively involved in huge trading in HUBCO
shares. If one can recollect contrary news, used to be published in a section of the
press. In this confusion some made millions and many burnt their fingers, but small
investors were hurt most profoundly.
Some of the analysts say that another large retail investor from
Lahore, who has access to the details of negotiations and court proceedings has been the
source of contradictory news regarding HUBCO. It is estimated that this individual, at any
given time, buys and sells HUBCO shares in lots of millions of shares. This raises two
basic questions: 1) What is the source of funds of this individual? and 2) Who are his
brokers. Apparently he should not have funds in such a quantum. Therefore, he may be
taking the advantage of lag in buying and settlement.
This raises question regarding exposure limit of brokers, the self
regulatory procedure of Lahore and Islamabad stock exchanges and the responsibility of the
Securities and Exchange Commission of Pakistan (SECP). Many of the analysts believe that
Lahore and Islamabad stock exchanges and SECP are not discharging their due duty. Whereas,
Karachi Stock Exchange has been more active and efficient. Therefore some of the investors
prefer to trade through two Punjab based exchanges.
Some of the analysts also say that KSE-100 index movement is also a
reflection of the perception of the investors about Pakistan's economy. For a considerably
long time interest of foreign investors in Pakistan's equities market has been very low.
The market is driven by large-scale retail investors. The philosophy of these two types of
investors is 'poles apart'. While foreign investors used to invest for short to medium
terms, local investors buy when price go down by 50 paisa and sell when price go up by 50
paisa. Since the ultimate objective is to make quick buck they rely more on inside
information rather than economic fundamentals for the company.
Other reasons forcing the serious investors to sideline are:
Pakistan-IMF relationship, precarious foreign exchange reserves position of the country
and the inability of the government to boost economic activities. Persistent fear of
strikes has further dampened the prospects for revival of the economy. The stock market is
driven by sentiments but one cannot ignore economic fundamentals. Since the confidence of
small investors has been badly shaken in the recent past, only institutional investors and
large retail investors drive the market. The lower trading volume is also the result of
preoccupation of large retail investors in settlement.
To bring back the serious investors into the capital markets, it is
necessary that SECP and the two stock exchanges located in the up-country should improve
self-regulatory system. There is also a need to adhere to the exposure limits of brokers
and impose heavy penalties for violation of code of conduct.