At a recently held press briefing by Moin Fudda, Managing Director, Karachi Stock Exchange (KSE), talked about the new trading system introduced at all the three stock exchanges in Pakistan. He said that introduction of this system would minimize the speculative activity that often emerges when shares are bought or sold in large quantities. Many of the jobbers deduce from such transactions that either a windfall is expected or that particular company is facing some problems. Whereas, most of these transactions fall in normal trading activity — particularly by the fund managers.

The KSE introduced the automated trading system in 1997 that was based on "disclosed trading system". According to that system all the transactions executed by the members were disclosed, both before and after, execution of such trades. The undisclosed trading system refers to the fact that the transactions executed by the members through the automated trading system are neither disclosed to counter-parties nor to the market participants.

One may tend to believe that the KSE has taken a novel step. However, it is fact that disclosed a large number of stock exchanges around the globe follow undisclosed trading system. It is believed that the disclosed system encourages speculation, compromises confidentiality of transactions and promote front-running.

The Securities and Exchange Commission of Pakistan (SECP) has always been very supportive and continue to extend support for bringing transparency and improve efficiency of the market. This is reflected by the fact that a number of reforms have been introduced during the last three years. This includes establishment of National Clearing Company of Pakistan, introduction of T+3 settlement system, registration of the brokers and agents, restructuring of the Board of Directors and currently the implementation of the undisclosed market.

The KSE has prepared trading system which was tested prior to its introduction. During the test necessary modifications were carried out to ensure smooth and proper functioning of the system. The new system has become effective from October 7, 2002 for which the necessary notification have been issued.

However, some critics believe that with the introduction of undisclosed market manipulation power of some of the large brokers has been enhanced. They say, "The market is dominated by a few big brokers and Badla providers. Their activities were evident in the previous system, but now they can create as much havoc as they like. Though the names of buyers and sellers will not be disclosed, it will still not be possible to keep it confidential. Previously it was disclosed, now they will have to spend extra energy and time to find out the names."

The capital market in Pakistan has gone through radical reforms and transformation. The confidence building elements in the trading of shares and securities have continuously improved. The launching of undisclosed trading is a another step forward that will discourage speculation and front-running. In order to strengthen and rationalize the procedure for the compliance of capital adequacy requirements, as a part of risk management policy, the local stock exchanges have also introduced various measures.

On corporate governance, there is a marked improvement in timely submission of annual reports with better disclosures of material information by the listed companies. The stock exchanges are constantly in touch with the SECP to ensure successful implementation of the code of corporate governance which is now part of the Listing Regulations.

It may be said that the regulators have taken various measures to bring transparency and improve the efficiency of equities market, but the regulators have not been able to eliminate insiders trading. Another front on which local stock exchanges have not been able to do much is, education of investors. In the past, many investors had lost their life savings in equities market. A large number of retail investors is still shy, despite the fact that equities offer incredibly high rate of return.

It is on record that the level of research reports prepared by brokerage house has gone down in the recent past. If one reads the recent reports it becomes evident that they often try to entice investors to invest in certain scrips. Traditionally research and trading departments of brokerage houses were separated by iron-clad doors. It is more or less evident now that trading departments grossly influence research reports — to the extent that they should invest or should not invest in a particular scrip.