One has to take into account some of the impressive strides made through timely actions by the present government

From KHALID BUTT, Lahore
Mar 20 - 26, 2006

Two prominent Directors of Lahore Stock Exchange, Dr Asif Baig Mirza and Omar Khalil Malik, have expressed the view that capital market growth in the country has been substantial notably over a period of past few years.

Talking to PAGE, they sounded upbeat and termed some recent tremors as part of the nature of normal trading which was volatile in nature. It is all matter of perception. When you look at the phenomenal growth recorded during recent 3-4 years and index touching record height, it shows a healthy trend. The very nature of market is zigzag and can never be seen in constant form. What you need is maturity and overall good governance in the sector, they opined. LSE like other exchanges all take their cue from KSE, which was the main trading center and sets the tone and tenor for entire capital market, which was growing rapidly.

They said one has to take into account some of the impressive strides made through timely actions by the present government. These came through clear and positive policies, restructuring of some giant public sector entities which were constantly in red and process of privatization which was undertaken with all seriousness to comply with some of World Bank conditionalities to remedy the basic parameters. The result of this is already largely visible in organizations like WAPDA, KESC and other entities where approximately Rs 100 billion were being sunk annually through subsidies. With the acceleration of privatization process, activation of regulatory bodies and bringing proper legislation, the fundamentals of national economy have been corrected to put it on the road to fast recovery and progress.

LSE Directors spoke of some impressive gains seen as a result of the above wise policies. These are clearly visible in cement manufacturing, banking, power and other sectors of industry to record impressive growth and profitability. This obviously has helped capital market to show buoyancy and impressive growth.

But the process of reform ushered in the stock market, constant vigil by regulatory machinery along with good governance holds the key to a bright future.

They also talked of a smaller private sector as in other countries compared to developed nations where it dominated over the public sector. There is need to reverse the trend here.

Both sounded sanguine about future and said with maturity and good governance the volatility of market can be controlled that to avoid the repeat what caused some serious crisis situation in our capital market. Obviously some lessons have been quickly learnt and measures like effective legislation and crisis management skills introduced in the system.

They both said LSE has grown steadily and its operation are being expanded to encompass some other important centers of Punjab Province.


Islamabad Stock Exchange has floated a new proposal of joint computerized trading of all the three stock exchanges under the National Marketing System (NMS) for a period of five years that would ensure more transparency, improve discovery of price, eliminate bourses fragmentation and put an end to decades old trading system through telephone.

The ISE has proposed five-year time horizon for the NMS to encourage brokers to invest in expanding their business and open their new branch offices.

The ISE has also proposed the levy of a market access fee that aimed at maintaining the financial interests of Karachi and Lahore Stock Exchanges.

Managing Director Islamabad Stock Exchange Aftab A. Choudhry disclosed this in an interview to The PAGE. He discussed at length the pros and cons of the National Market System, a copy of which had been provided to The Nation.

The MD ISE said that Pakistan's stock market was giving its investors exceptional returns, thanks to the country's economic growth and reforms carried out in stock market.

However, a fundamental structural issue that stock market has been facing for a long time remained neglected, which was its fragmentation, he said, adding the stock market was fragmented because orders of investors entered into trading system of one exchange could not be matched with those entered at another exchange, even if the security being traded is listed at both exchanges.

Since most of the trading takes place at KSE, members of ISE and LSE telephonically route many orders of their client-investors to members of KSE, resulting in large inter-exchange trading.

Choudhry said that ISE is now putting forth a win-win business proposal of National Market System (NMS) to end market fragmentation taking into account the interest of all stakeholders.

The NMS means that KSE, LSE, and ISE link their trading systems such that orders of investors entered in the trading system of any one exchange would be matched with those entered in any other exchange, he elaborated.

The system would cover all market segments and commonly listed securities and each exchange would maintain its independent existence and identity and regulate its members and orders entered into its trading system.

According to proposal, the members of exchanges with lesser turnover would pay market access fee of 2 paisas per share traded in every eligible trade to members of exchanges with greater turnover. Members of KSE would receive market access fee both from members of LSE and ISE.

The members of LSE would receive market access fee from members of ISE.

According to plant, the market access fee would be applicable to "eligible" trades in which (a) one order (bid or offer) to a trade comes from a trading terminal of KSE and the other from that of LSE/ISE or (b) one order to a trade comes from a trading terminal of LSE and the other from that of ISE.

It would be distributed among the paying members based on their proportionate NMS turnover compared to other active members of their exchange. It could be distributed among the receiving members on the same basis or it may be distributed equally regardless of turnover.

It would be settled daily through the NCSS along with other settlement obligations of members. NMS would cover five years to realize its benefits and there would be no increase in rate of market access fee during this period.

NMS would end market fragmentation and offer substantial advantages to all stakeholders.

Advantages of NMS to the investors are greater liquidity, better price discovery, and elimination of custody risks in inter-exchange trading, lower cost of trade, better quality of trade execution, and broader market access.

There is no disadvantage of NMS to the investing public. Core advantage of NMS to members of KSE is that they would receive large and recurrent market access fee. There is also a large potential for growth in market access fee because of a substantial room to increase in market access. Due to segregation of clientele served by members of KSE and neutrality of NMS towards assets of KSE, NMS can only increase the value of memberships of KSE.

There would be some negative impact on trading fees of KSE because inter-exchange turnover in the current fragmented structure would then be routed through trading terminals of ISE/LSE and arbitrage business would be largely eliminated.

Members of KSE who carry out inter-exchange trading and inter-exchange arbitrage would face a disadvantage. These members, however, make a relatively small proportion of overall 160 active members of KSE and their business is not entirely dependent on inter-exchange trading and arbitrage.

Core advantage of NMS to members of LSE is that they would be able to serve their clients better and expand their business because of direct access to a large market. Due to Establishment of National Market System in Pakistan segregation of clientele that members of LSE serve, there would not be an adverse impact of NMS on value of memberships of LSE.

Trading fees of LSE would increase, as most of orders currently routed by members of LSE to KSE would be routed through trading terminals of LSE. As in case of KSE, a few members would face a disadvantage, as inter-exchange arbitrage business would be eliminated.

Meanwhile, advantages of NMS to members of ISE would be the same as those to members of LSE.

Presently, the members of ISE, however, would not receive any market access fee but pay it to members of KSE and LSE. Advantage of NMS to SECP and Government of Pakistan is that it would facilitate them in achieving broader policy objectives in the stock market.

The NMS would help in development of Pakistan's stock market in line with international practices, broaden investor base, improve trading transparency, and increase effectiveness of market surveillance.

Since NMS would increase turnover and therefore traded value, it would also increase the amount of CVT paid to the Government of Pakistan and the regulatory levy on traded value paid to the SECP.

There are no disadvantages of NMS to the SECP and Government of Pakistan.

Key issues in implementing NMS are modification of trading infrastructure, changes in regulations of exchanges and NCC, modification of NCSS, review of CFS regulations, modernization of corporate announcements mechanism, increase in listings at LSE and ISE, and sharing of implementation costs by the three exchanges.

Alternatively, if members of KSE decide not to join NMS, then ISE and LSE could from a common trading platform. Together LSE and ISE can produce a turnover in excess of 100 million shares per day.

It would reduce reliance of members of ISE/LSE on members of KSE and help bring inter-exchange turnover back to LSE and ISE. Members of ISE would pay to members of LSE market access fee, on the same lines as in NMS. The alternative model would be resorted to only if members of KSE do not join NMS.

Aftab Choudhry said that the NMS was a win -win business proposal that could end market fragmentation to the advantage of all stakeholders. He said that the ISE was urging the stakeholders to study and discuss the NMS model so that an agreement could be reached on its implementation.