KARACHI: Old-timers in the stock market remember the days when owning a brokerage meant owning a part of the stock exchange.

A couple of hundred brokers “owned” the stock exchange in literal terms, besides reserving the right to trade securities on the platform, until 2016 when a consortium led by Chinese investors acquired a 40 per cent shareholding and management control of the bourse.

The exchange was then de-mutualised, in the sense that ownership and trading rights were separated. But the expectation that a restructured stock exchange would immediately lead to an increase in the number of investors never materialised.

The number of individual accounts was only 290,316 at the end of July 2023. The number of acco­unts held by institutional investors and “funds/others” totalled 1,803 and 1,285, respectively. For context, the number of crypto wallets — which hold the keys to investors’ digital coins stored on public block-chain networks — in Pakistan hovers around 10 million despite a big question mark on their legal status.

Focus on market expansion with lower costs and client-focused services

“A major reason for the limited outreach of brokerage businesses is their lack of focus on client servicing and on-boarding,” said Shoaib Lalani, CEO and co-founder of FinPocket, a stock investing app that currently operates in partnership with a conventional brokerage house.

Mr Lalani says his firm is gearing up to become a full-fledged brokerage under the Securities and Exchange Commission of Pakistan’s new Licensing Regime for Online-Only Brokers.

Signing up for the new regime, which is currently accepting applications from aspiring brokers, will allow Mr Lalani to offer full-scale services to stock investors at a fraction of the cost being borne by conventional brokerages.

The online-only brokers will limit themselves to trading and customer on-boarding only. In other words, they’ll get a head-start in terms of lower preliminary infrastructure and limited operational and overhead costs.

One of the biggest reasons for reduced costs for the online-only brokers is that they’ll be required to sign up for the services of a professional clearing member (PCM) like EClear Services Ltd, which is the country’s first PCM entity set up by the Central Depo­sitory Company (CDC). The PCM will assume the clearing, settlement and custody functions while letting online-only brokers focus on increasing customer outreach.

The clearing function in a stock market relates to the settlement of trades. A clearing member is suppo­sed to match buy and sell orders and transfer money to the seller while moving shares to the buyer.

In simpler words, the arrangement with EClear Services will mean that the online-only broker won’t have any risk of clearing and custody defaults while its costs will go down substantially because of lower infrastructure requirements.

Speaking to Dawn, CDC CEO Badiuddin Akber said the online-only broker regime is expected to leverage technology to increase client outreach.

“We have global examples like Robinhood and Zerodha where online brokerages created a mass market for themselves and expanded their services to the previously unserved segments of society. We hope the new regime will lead to similar results in Pakistan,” he said.

Since all cash handling, custody of shares and settlement functions will be outsourced, online-only br­o­kers will have all their resources to spare for ensuring investor convenience in terms of account opening and trade facilitation. The minimum net worth requirement as well as new licence and licence renewal fees for online-only brokers are half of what conventional, brick-and-mortar brokerages pay.

The online-only brokers won’t be allowed to undertake proprietary trading or deal in cash, which will be handled through EClear Services. That means they won’t face any mandatory requirement for getting a credit rating either.

Published in Dawn, September 11th, 2023