ISLAMABAD: Following a massive decline in volumes, the Pakistan Stock Exchange (PSX) on Friday relaxed the new short selling regulations for three months.

The decision was made after stakeholders met with the Securities and Exchange Commission of Pakistan (SECP) chairman.

Prior to the meeting, the PSX wrote a detailed letter to the SECP Securities Market Division commissioner highlighting that following the announcement of short selling regulations, the index had lost 3,126 points or 8.44 per cent in just nine working days from April 30 to May 13 and is likely to deteriorate further with the passage of time, “as we move close to the last days of Deliverable Futures Contract (DFC) for the month of May 2019.”

The end of Deliverable Futures Contract Market (DFCM) May is likely to be catastrophic for the market as investors who bought shares under DFCM for May will not be able to find hedgers and will be forced to square their positions to avoid deliveries, the letter warned.

It added that under the new interpretation of short selling rules, “hedgers, providing volumes and price discovery, were barred from swapping/hedging positions between regular and future market.”

This is exactly what happened on April 29 [when the] KSE-100 index closed at 37,026 with average volume for April at around 200 million. Moreover, the hedgers were barred on April 30 not only during market hours but also between the May contract of DFCM.

On the other hand, stock brokers have said the volumes are unlikely to recover despite suspension of rules that restricted blank sale and short selling because the relevant rules were not compatible with the Karachi Internet Trading System (KiTS) electronic trading system currently used by the PSX.

The issue was also highlighted during the meeting held between stock brokers and SECP chairman, SMD commissioner and capital market stakeholders, PSX management, National Clearing Company of Pakistan Limited, and Central Depository Company of Pakistan Limited.

“Several issues related to F5 window and F8 window of the trading system were informed to both the PSX and the SECP, and in the absence of a compatible trading system, the brokerage houses cannot enforce compliance of the rules from hundreds of clients using KiTS for trading as online clients,” said a senior stock broker.

Published in Dawn, May 18th, 2019