KARACHI: Having been in business for decades, stockbrokers realise that when the regulator calls, it is seldom to convey good news.

The Securities and Exchange Commission of Pakistan (SECP) called on 10 to 15 brokerage houses last fortnight to enforce the ‘Net Capital Balance’ regulation that sent shivers through the market. As nervous investors ran for cover, it brought to a halt trading by the affected brokers and, in effect, putting a squeeze on the trading volume.

Setting aside the sharp recovery of 346.41 points in the KSE-100 index on Friday, the Pakistani equities, which have been on the slide from the start of February, have seen the index plunge by 1,894 points, or 5.5pc.

What goes on between the regulator and the broker fraternity is scarcely made public, which is why investors have to trade blindly following rumour mongers.

The information gathered from knowledgeable market players revealed that certain brokerage houses were thought to be utilising clients money to meet the ‘net capital balance’ (NCB) requirement; the sum of receivables on the brokers’ books was also sometimes added to inflate the NCB. “It put the clients’ money in jeopardy because if delivery were to be taken, it would have a domino effect on the entire market,” explained a market participant.

The regulator’s weight on the few brokerages to put them in order, invariably impacts all of the market as the number of major players is no more than 25-30.

Market whispers suggest that the SECP and the stock brokers had reached some sort of ‘agreement’, but it could not be independently confirmed.

Although the bigger issue is related to the regulator’s role to curb ‘insider trading’, most of the market stalwarts wanted to sweep it under the carpet since some big names (funds and managers) were believed to have come under scrutiny.

Other major reason for the market decline starting from February is the foreign investors’ persistent selling. Last week, stocks worth $28.49 million were offloaded by foreign fund managers. The month-to-date portfolio outflow now stands at $32.92m and year-to-date at $92.59m.

Investors were spooked also over the deteriorating law and order situation and finally mutual funds resorted to heavy profit-taking to liquidate holdings mainly in their “Equity Protected Funds”.

In a declining market, mutual fund managers thought it wiser to take profit and cover the unit holders’ capital.

Published in Dawn, March 15th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play