KARACHI, Aug 19: More than a quarter of the total shares traded daily on the stock exchanges pass through settlement (delivery). The trend has changed dramatically in the last six years, prior to which just 10 per cent of the turnover was ‘delivery based’ and the rest of 90 per cent was labeled as ‘speculative’ or ‘day-trading’.

It was then that after prayers in the morning for a good day, the small investors headed for the stock market, bought and sold shares the same day and went home grinning or sulking -- depending on whether the market had added some small sum to their wealth or taken it away.

But all that has changed. Speculation is still the spice of trading. But the equities markets in Pakistan long since regarded as distasteful for being over spicy have just about found the right ingredients.

The ‘intra-day trades’ are fast replacing ‘delivery-based purchases’. Market participants like to put that to rising investor confidence. Considering the series of crisis that the bourse has to go through each year, the increase in investor confidence could be taken with a pinch of salt.

There are nonetheless more tangible reasons for the investors to opt to take delivery, instead of washing their hands off the stocks at the end of the day.

Mohammad Sohail, director equity broking and research at JS Capital Markets, mentions the reasons as “extraordinary gains provided by the equity market in the last few years; foreign portfolio investment; growing local mutual funds industry and easy availability of funding (CFS/badla and share financing)”.

In his report on the issue, Mr Sohail points out that Pakistan’s capital markets have shown rapid growth in the last few years. Market capitalisation of the Karachi bourse is currently close to $50bn (42 per cent of GDP) compared to only $7.5bn (11 per cent of GDP) in 2000.On a daily basis, $611 million (12-month average) worth of shares change hands on the cash/ready counter at the Karachi bourse. Add to that the daily $254m of stock futures and $390m of CFS (badla) trading. “All of that makes Pakistan one of the most actively traded stock market in Asia, with turnover

velocity (turnover divided by market capitalisation) of close to 300 per cent,” says Mr Sohail. Those higher volumes on the one hand provide the much needed liquidity and depth to the market and on the other, the excessive volume suggests that the market is over speculative.

The three stock exchanges of the country last year settled shares worth Rs2,294bn ($38bn). That works out to an average daily settlement of Rs9.4bn ($156m), which measures to 24 per cent on an average of the total market turnover. On an average 85 per cent of the turnover and 88 per cent settlement occurs through the main Karachi market, with the other two in Lahore and Islamabad chipping in just the small bit.

For conducting the analysis, the settlement value of the ready, CFS and futures market provided by National Clearing Company of Pakistan Limited (NCCPL) has been used. To determine the market volume, turnover of shares at all three exchanges has been included, rather then utilizing the NCCPL turnover data for the sake of better comparison.

“It has been observed, based on our study that the delivery ratio (that is amount settled divided by total value of turnover) has increased over the last few years. From an average of eight per cent in FY04 to 17 per cent in FY05 and then in the outgoing fiscal year it was 24 per cent,” the JSCM report states.

Compared to neighboring India, this delivery ratio is not at all bad. At NSE-India (National Stock Exchange of India) with average daily volume of $1,633m, the delivery based buying was 28 per cent ($449m) in FY06. It was 26 per cent in FY05 and 20 per cent in FY04 at the NSE. Similarly, at the BSE (Bombay Stock Exchange) the delivery ratio last year was 37 per cent compared to similar 37 per cent in FY05 and 25 per cent in FY04.

One interesting observation that emerged from the study was that every time the delivery ratio improved, a positive rally was generated in the market and vice versa. Since a higher delivery ratio means diminishing supply of shares, consequently share prices started moving up and went the other way round in opposite case. As an example, in June 2006 when the average delivery ratio was recorded at a high 32 per cent, the market started improving and rose three per cent during that month.