KARACHI, June 10: The phasing out of carryover trade (badla) from June 7 will result in weekly reduction of a staggering 20 million shares from the stock market. And most of those scrips are likely to flow into an open interest position in the futures counter. Already within the first two days (June 8 and 9) of the first week of badla phase out, a total of 27 million shares had moved out of badla and concurrently 16 million new shares had found their way back into the futures market.
On the basis of a notice and the accompanying schedule of gradual reduction in COT position in each of the seven scrips now in the ‘badla’ -– PTCL, OGDC, NBP, POL, PSO, Hubco and DGKC — released by the Karachi Stock Exchange on Wednesday, analysts, Hasnain Imam and Noman ul Haq, at Arif Habib Securities, prepared and released an enlightening report on Friday.
Phasing out of CoT with margin financing — the buzzword for today — has been at the heart of risk management measures currently being pursued at the bourses. In an attempt to address the queries relating to the subject, the KSE management issued a notice on Wednesday, clarifying and explaining the ambiguities related to the phasing out plan. The KSE management had also set June 7 as the benchmark on COT position for phasing out and its gradual replacement with margin financing.
“At that date, the number of shares in the Karachi badla market stood at 241.238 million shares,” stated the AHSL analysts. They calculated that the planned weekly reduction by 8.25 per cent in each of the seven scrips for the first 11 weeks would mean that approximately 19.9 million shares would leave badla every week and close to 22.2 million shares in the last three days. Scrip-wise, the highest reduction in number of shares per week would be witnessed in PTCL (8.6 million shares) followed by OGDCL (4.6 million shares), DGKC (1.9 million shares), NBP (1.48 million shares), HUBCO (1.3 million shares), POL (0.96 million shares), and PSO (0.91 million shares).
The analysts have drawn up a schedule of badla position in the seven scrips and open interest position over the futures counter during the week June 2 to 9, which showed a drop of 19 million shares in badla on June 8, 2005 — the first day of the week on which the badla phase out plan was put into place.
Meanwhile on the same day, the open interest position over the futures counter surged by 13 million shares. “Also look at what happened on June 09, 2005,” the analysts pointed out, adding that on June 9, 2005, the number of shares outstanding in badla dropped by another eight million, while the open interest position over the futures counter climbed by three million shares. All of that indicated that within the first two days (June 8 and 9) of the first week of badla phase out, a total of 27 million shares moved out of badla while 16 million new shares found their way back into the futures counter.
The analysts have also measured the impact on turnover (in number of shares) at the KSE in the three days extending from June 7 to 9. On June 7, the turnover in number of shares at the KSE was 303.995 million shares. A day later, on June 8, turnover stood at 481.733 million shares, evidencing a jump of 177.74 million shares. Then came the badla phase out plan. On June 8, which happened to be the first day of the week from which the badla phase out plan was put into force, volumes at the KSE dropped substantially. “This is evident in the turnover in number of shares on June 8, 2005 that dropped by 298.097 million shares (day-on-day) to 183.636 million shares on June 9, 2005.
The analysts visualized that a forced movement of 20 million shares from badla each week would put those seven scrips under pressure, which would result in a pressure on the market as a whole. “These shares would find their way primarily over the futures counter and some even into margin financing,” the AHSL analysts figured out. They observed that badla currently contributed substantially to the liquidity and the volumes at the bourses. Resultantly, in the days to come, the market may see declining volumes and shrinking liquidity. But for all that, everyone, including the AHSL analysts, admits that margin financing is a reality; it is there to come and replace badla. “But to what extent are the banks geared up to provide margin financing is a question that only time will answer,” the analysts concluded.
