Before relinquishing the charge, Khalid Mirza, the
then Chairman of Securities and Exchange Commission of Pakistan (SECP)
granted the permission for establishing an electronic communication
network (ECN). The general perception is that it is not an ECN but
virtually the birth of fourth stock exchange in Pakistan. Some of the
leading brokers have vehemently criticized this act of Mirza. Their
basic premise is, "The permission has been granted without due
diligence and in a dubious manner." Both the regulators and brokers
are trying to put forward convincing argument. But the secretive manner
in which this permission has been granted raised many questions.
According to some analysts, "Karachi Stock
Exchange and the other two exchanges operating in the country is the
club of brokers. These clubs, previously considered to be the exclusive
domain of equities brokers, have been gradually intruded in the name of
bring transparency and good governance. The most striking feature over
the years has been the initial resistance by the brokers fraternity and
unequivocal submission at the end, be it the question of non-member
directors, appointment of the managing director of KSE or
demutualization of stock exchanges. Therefore, the initial response to
ECN was also considered as 'usual' attitude. The acts of large brokerage
houses contradict their statements being printed and broadcast. All the
top brokers are getting ready to join the proposed ECN. "
Therefore, there is a need to first find out reply to
two basic questions: 1)
what is an ECN? and 2)
does the country require such a facility? In simple words an ECN is a
network established to facilitate electronic trading at stock exchanges.
As e-business has become a norm globally, there should not be any
resistance to establishment of ECN in Pakistan because it will
facilitate 24 hours a day and 365 days a year trading. However, it is
very appropriate to discuss whether the proposed ECN is a network only
or the birth of fourth stock exchange in the country.
At present the world is moving towards demutualizing
of stock exchanges and reducing the number of exchanges operating in a
country. Efforts are also being made in Pakistan for demutualizing the
three local stock exchanges and reducing the number to one. Therefore,
there is a dire need for the establishment of ECN in the country. The
experience of AKD Trade, an online trading facility, shows that online
trading has not only the potential to handle large trading volume in
limited trading hours but also to attract small investors to equities
market. It has been made possible only due to the existence of Central
Depository Company (CDC) ensuring paperless securities system in the
country, a prerequisite for electronic trading. According to some
analysts the resistance against the proposed ECN is based on the
understanding that it is not a network but establishment of the fourth
stock exchange. Only the sponsors of this ECN and regulators can remove
Some analysts believe that the main reason for
resistance is the fear of loss of market worth of the tickets acquired
by the members. It is understood that the membership fee of the ECN will
be only a fraction of the prevailing market value of the tickets owned
by the brokers. However, some analysts believe that the ECN will provide
an alternate trading system and the brokers will have to become member
of both the systems to retain their existing positions. Therefore,
establishment and participation in the alternate trading system will add
to their cost and reduction in profit.
Some of the investors using AKD's online trading
system say, "It is not only efficient but cost effective.
Establishment of an ECN will further improve the efficiency and more
active participation of investors." Since November 2002, AKD Trade
has been working without the gateway, to be provided by the Karachi
Stock Exchange and entering 1,500 to 2,000 trades manually. Despite this
limitation AKD managed to acquire over 2.5% share of the daily trading.
It is believed the gateway has been established and under testing and
share of AKD Trade may improve further.
There is no denying to the fact that the
establishment of alternate trading system can play a vital role in the
growth of equities market in Pakistan. However, a lot of confusion
prevails due to lack of details about the system and certain
ambiguities. This confusion must be removed at the earliest. The
brokers' fraternity must also give up the habit of receiving the change
with fear. Their growth and prosperity is directly dependent on the
growth of equities market. The growth of equities market is linked with
the establishment of efficient trading and settlement systems.