October 22, 2007	Monday	Shawwal 9, 1428

After witnessing a correction from its all time high of 14200 points, KSE-100 index has again made new high above 1450 points. Earlier, the political uncertainty had damaged the sentiments of market punters. The slump in the regional and international markets also contributed to the bearish sentiment. However, the situation has changed with latest political developments and foreign fund inflows.

The KSE-100 which was struggling in four digits about seven years ago, is comfortably trading above 14000 points.

The performance is attributed to investors’ confidence and business sentiment gained from consistent government policies. The inflow of money from abroad after 9/11 has been the key economic driver and a major source of liquidity that has pushed stock prices to such high levels.

Of course, economic fundamentals have played their part. Market may have seen some bubbles in the recent past but it is now corporate profitability that has helped market to cross those levels that seemed very speculative and manipulative at that time. SECP’s rigid stance on the enhancement of CFS limit and removal of in-house ‘badla’ restricted many small leverage punters from acquiring excessive positions in the stocks.

However, SECP should adopt accountability with responsibility policy. The team working on CFS-MKII has given several deadlines for bringing in the new product in the market but failed. Institutional margins are also a very critical issue that has not been introduced despite so many deadlines.

Brokers have expressed their concerns when margin requirements were being tightened on them. They argued that it will be very difficult for them to do active leverage trading in their bourses for their clients and hence it will affect their business.

It was decided that a system will be developed for direct depositing of institutional margins with stock exchange as they do not deposit margins with the brokers and buy in big numbers. However, nothing has been done in this regard and no framework has been developed.

The Bombay Stock Exchange has shifted the burden of leverage on futures market after removal of badla. The rules and regulations in the futures market have been designed in such a way that they provided ample support to the market at the time Badla was being removed

Mr Murugappan, executive director of ICICI securities, India recently visited Pakistan. According to him, “the current hike in the Indian equities is well supported by futures market, which is efficient enough to support leverage and allows room for working of hedge funds”

Contrary to this, future market in local bourses has never been an attractive mode of trading for punters. It lacks liquidity and hence price discovery.

The open position at the rollover week in last many months is more or less the same despite 45 per cent rise in the market in this calendar year.

On one end, the SECP ensured that 30, 60 and 90 days contracts should be introduced by the KSE management but on the other hand discouraged trading in these contracts by strict margin requirements in form of cash.

CFS remained on its upper limit for a long time and it has come to that level again. It could be an ideal time for the active trading in these contracts if there was any attractiveness for the leverage traders in the futures market.

However, no activity whatsoever has been seen in this avenue. It clearly indicates that SECP needs to review the rules that it has implemented to avoid the trading risk.

At the time when CFS rates are very low due to excess liquidity, institutions are unable to make money through ready future arbitrage because spreads are low due to lack of interest.

Short sell is always a very attractive trading practice in the futures which also supports the market through short covering in the times of prevailing declining trends.

No equity market in the world may have ever witnessed so much volatile decision making in this form of trade as the local bourses. Another change recently took place when short sell limit per scrip per UIN was raised from 0.5 to one per cent. In a free market, there should not be any limit on it.

Although there is no concrete proof of the insider trading, bourses have always been blamed for this. The board of directors of many listed companies include representatives of leading brokerage house.

The SECP should develop guidelines in this regard as it creates doubts about the transparency in distribution of financial results to all the market participants at the same time.

When universal identification number (UIN) was introduced in the market last year, many claims were made about the possible improvement in trading practices in the bourses. However, no result has been made public about the call mate fiasco.

SE directors of the previous board informed that five parties have been identified through UIN number who were involved in the manipulative trading in the shares of callmate telips. Many people suffered and are still waiting for the result of that investigation after almost one year has elapsed.

Proprietary trading is also an area where SECP should focus and put some restrictions. UIN can ideally be used for this purpose.

The bourses and SECP have agreed on the demutualisation draft. It seems very likely that KSE will be demutualised by December this year---the given deadline by the demutualisation cell.

One can hope that after acquiring a new identity, KSE will ensure good business practices, improve its management and be answerable to its shareholders.