CCP INITIATES INQUIRY AGAINST KSE

SHAMIM RIZVI
Mar 17 - 23, 2008

The Competition commission of Pakistan (CCP) has initiated an inquiry against the Karachi Stock Exchange (KSE) on the alleged abuse of dominant market position. The decision has been taken on a complaint lodged by Islamabad Stock Exchange (ISE) under section 30 of the Competition Commission Ordinance 2007 demanding action against KSE for contravention of the provisions of section 3 of the ordinance, which forbids abuse of dominant position.

As explained in the said section 3, "an abuse of dominant position shall be deemed to have been brought about, maintained or continued if it consists of practices which prevent restrict, reduce or distort competition in the relevant market." The complaint was lodged by the ISE but later the Lahore Stock Exchange (LSE) endorsing the complaint of ISE, also became a party to proceeding against KSE.

The ISE has raised the following issues pertaining to the KSE before the Commission. First, there are three stock exchanges in Pakistan i.e. KSE, LSE, ISE. On all these stock exchanges, various securities of a number of listed public companies registered anywhere in Pakistan are traded. Thus for all intent and purposes, i.e. geographical and product-wise, these exchanges constitute "relevant market" for trading of securities.

Secondly, there are 654 companies/securities listed on the KSE, whereas 516 are listed on the LSE and 247 on the ISE. However, it needs to be appreciated that most of the companies listed on the ISE are also listed on the other exchanges and constitute 90 percent, of the total trading volume of listed securities in Pakistan. Of this 90 percent, 87 percent of the trading market belongs to the KSE, whereas the ISE and the LSE collectively account for only a meager 13 percent of such trading and, therefore, unquestionably, there exists a "dominant position" of the KSE in the relevant market.

Thirdly, although the basic principle of the securities market is that "investor must be assured that they are participants in a system, which maximizes the opportunity for the most willing seller to meet the most willing buyer", in practice, this principle is not applicable in Pakistan.

Fourthly, the KSE and its members, in practice, ensure that access to the "best price" for a particular security, which is mostly available at the KSE only, is not available to other exchanges, including the ISE, thus depriving investors of such exchanges of an equal opportunity of having a fair and not-discriminatory access to quotation displayed at the KSE, thus depriving them to match offer quoted at the KSE.

Fifthly, the bids and offers of investors, who entered into trading systems of one exchange, cannot be matched with those entered at another exchange, even if the security being traded is listed at both exchanges and for that reason, ISE members has to route many orders of their clients (investors) through the members of the KSE, resulting in large scale trading without being regulated by either of the exchanges. Moreover, investors at the ISE have to pay higher out of pocket brokerage costs.

Sixthly, since the KSE attracts the bulk of trading volume, the financial institutions in search of good prices also place their orders at the KSE, hence, producing more liquidity, this results in application of dissimilar conditions to equivalent transactions thereby placing the investors at other exchanges at a disadvantage.

Seventhly, the abuse of dominant position of the KSE is occasioned due to absence of a system of centralized market enabling access to all market centers to national pool of liquidity for the best/universal execution of the investor's orders.

The Competition Commission is of the view that if the contents of the ISE complaint are true, it could be possible violation of section 3(2) and 3(3) (a) (e) and (g) of Ordinance on the part of the KSE. The Commission has, therefore, decided to initiate an inquiry under section 37(2) of the Ordinance and invited views of both the KSE and the LSE.

Meanwhile, the ISE has alleged that the KSE abuses its dominant position in the relevant market, inter alia, due to the practices carried out by the KSE and its members, which has the effect of preventing and distorting competition in the relevant securities market of Pakistan. The KSE and its members have maintained the said practices which prevent, restrict and distort competition in the relevant market and thus constitute "abuse of dominant position" in terms of Section 3 of the Ordinance.

The CCP, as an initial step, sent a copy of the ISE complaint to KSE for their replies comments on the points raised therein, KSE has denied organizing the structure of the securities, market in manner through which order of the investors entered into trading system of one of the exchanges could be matched with those entered at other exchanges even if the security being traded is also listed at the other Exchanges.

KSE has also denied putting in place and giving an access to the investors to:

i) A fully computerized market capable of linking all liquidity providers in a given stock together, so that they can compete with each other quickly, efficiently and on an equal footing.

ii) A trading system through electronic communication networks capable to electronically match buy and sell orders (both retail and institutional) executed in a manner that could be the most beneficial to the investors.

According to CCP experts it transpires from the complaint that:

1. KSE is an undertaking as defined in section 2(1) (p) providing service of trading in securities;

2. 90 percent of the total securities which are actively traded in the securities market are listed on all the three stock exchanges. Therefore, the securities market comprising of KSE, LSE and ISE is a relevant market in terms of section 2(1) (k) of the Competition Ordinance:

3. 87 percent of the trade volume of the traded in the securities market is handled / captured by the KSE. Therefore, the KSE is having a dominant position in securities trading market in terms of section 2(1) (e).

The CCP has sent copies of complaint as well as the reply received from KSE to the Securities and Exchange Commission of Pakistan (SECP) asking for their comments as being the sector specific regulator. The CCP is waiting for the SECP comments before starting a formal inquiry.