KARACHI: The Pakistan Stock Exchange (PSX) nud­ged “interested applicants” on Wednesday towards the ne­wly introduced online-only category of securities broker.

The online-only brokerage — which is a subcategory of the trading-only brokerage class — allows the customer onboarding process and trading services to take place entirely through online channels.

Substantially lower entry costs and financial resource requirements make the new category an “ideal choice” for those looking for a cost-effective way to offer brokerage services, the exchange said in a brief note to potential applicants.

The online-only brokers will limit themselves to trading and customer onboarding only, which will let them have 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 solely 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 the PCM 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.

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 the PCM. That means they won’t face any mandatory requirement for getting a credit rating either.

All public or private companies, including single-member companies, can apply to the Securities and Exchange Commission of Pakistan for a licence.

A company will have to acquire a PSX Trading Right Entitlement Certificate (TREC) against a one-time fee of Rs1.25 million to become an online-only broker. It’ll also have to meet the minimum net worth requirement of Rs7.5m with a base minimum capital of Rs1m deposited with the PSX at all times.

Published in Dawn, November 9th, 2023