.

1- KESC PRIVATIZATION
2- KESC REDUCED SECURITY DEPOSIT RATE
3-
FAST GROWING MARKET OF TFCS
4- DEBT RESCHEDULING WITH JAPAN
5- PAKISTAN'S FOREX RESERVES
6- ESTABLISHMENT OF AN ECN?
7- NEW RULES FOR NBFC
8- SDK CHAINS REAL TIME PILLERS

.

ESTABLISHMENT OF AN ECN?

There seems to be a lot of hue and cry on the way the permission was granted

 

By SHABBIR H. KAZMI
Apr 07 - 13, 2003

 

 

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 this confusion.

 

 

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.