ISLAMABAD, Feb 14: Securities and Exchange Commission of Pakistan announced on Friday the establishment, for the first time in Pakistan, of an Electronic Communication Network (ECN) as an automated trading system that may function as the fourth stock exchange.

One of his last decisions before quitting as the SECP Chairman, Khalid A. Mirza told newsmen that the ECN, to be operated by PEX Limited, a subsidiary of Jahangir Siddiqui, who have been in the securities and brokerage business in Pakistan since 1970, would be a self-regulatory entity.

Alternative trading systems, known as ECNs, he explained, had become integral to modern securities markets, providing investors with enhanced flexibility and reduced trading costs, as well as competition to the established securities exchanges. Trading under this system would require the simultaneous presence of shares and the money to buy these, thus minimising the role of ‘badla’.

Further elaborating on the concept, ECN was like pre-verified trade whose existence had immunised the Islamabad Stock Exchange from the crisis that, in May, 2000, had caused the crash of the older stock exchanges of Karachi and Lahore.

The introduction of ECN offers a long-cherished solution envisioned by the outgoing SECP chief to the problem of the guaranteed stock exchange owned mutually by the brokers. The ECN, on the other hand, would operate a demutualised, for-profit, entity which, he said, would lower the transaction cost.

The brokers can become its members or even establish their own ECN after obtaining the Commission’s permission. An ECN, he further stated, would be free to trade in shares of companies that are already listed with the stock exchange(s) and can enlist new companies subject to fulfilment of requirements of the listing regulations of the SECP.

The registration of the first ECN also fulfils a requirement of the second tranche conditionality of ADB’s Financial Market (non-bank) governance programme loan 2002-05. It requires the stock exchanges and the SECP to develop a comprehensive plan to encourage integration of stock exchanges and to facilitate the setting up of ECNs and ATSs (Automated Trading Systems) for establishing a national market.

Mirza replied in the affirmative to a question whether ECN would function in competition with the stock exchanges on the basis of transaction cost and other services to the investors.

Asked about the reason for grant of permission to PEX Limited, he said, it was the first to respond to his overtures to the brokers to go in for electronic trading. A presentation by the sponsors/promoters of PEX Limited held before the SECP on February 10.

Representatives of the three bourses were also present. The establishment of an ECN in Pakistan, SECP concluded, would provide significant advantages to a variety of subscribers through increased opportunities for trading, efficiency of execution, i.e. lower costs and enhanced liquidity, thus imparting greater depth to the capital market.

While issuing the certificate of registration, however, the Commission took into account the fulfilment of a number of conditions including the provision of an adequate regulatory model with provisions regarding regulations for trading, qualifications of membership, constitution and powers of the governing body, installation of a satisfactory risk management framework, etc.

Answering questions by newsmen about reasons for his decision not to continue for the second term of his office as SECP chief, he said he had to choose between five years of secure service with World Bank plus associated pension benefits and three years of a potentially insecure service with the SECP with no pension.

Moreover, he had requested a status as non-bank capital market regulator (SECP Chairman) equal to the status of the head of non- bank sector (Governor, State Bank) in order to render SECP’s functioning effective and credible.

Paying tributes to his predecessor, Shamim Ahmed Khan, he said the achievements of SECP over the past three years had been without precedent in its ability to bring the capital market regulation close to international standards.

About the agenda of reforms that still remained to be implemented by the SECP, he said he would like to see all the listed companies becoming members of CDC, implementation of anti-money laundering measures, curbing over-invoicing and other financial crimes. Another unfinished task was the disciplining of the auditors’ profession.