Stock trading: identification of buyer/seller, fair or foul
About two years ago, the KSE had pulled shutters on the Karachi Automated Trading System (KATS) broker information windows so as to block on-line identification of names of parties during trading, but the membership codes remained exposed to the public eye during execution of the trade. It is now proposed to wash the codes out until the deal is finalised and trader/dealer is in receipt/payment of money from the clearing house—i.e till the final settlement.
For nearly 50 years—to May 27, 1998 when the ‘open outcry’ system was fully replaced by the automated trading system (KATS)—the trading hall of the KSE would reverberate with the mixed sounds of “La-o” or “Lay”: the former cry by the buyer and the latter by the seller. With the entry of the foreign investor in the early nineties, came the need to modernise. Funded by the Asian Development Bank’s capital market reforms loan of $125 million, the KSE replaced the ‘open outcry’ system of trading with KATS.
One of the old time broker, who has been a past president at the KSE says: “When trading through KATS was first launched, the stock exchange had decided to let the identity of buyer and seller remain anonymous”, This member who is known to be one of the most vociferous campaigner against on-line identification of trading parties says that a little later, some brokers were able to hack the system and manage to get access to such ‘inside’ information. “Instead of stopping this abuse, the stock exchange in its wisdom thought it proper to allow this facility/abuse to extend to all members”, contends this broker.
Ever since its inception, the membership of the KSE has remained frozen at 200; each member holding a card that has seen its value fluctuate wildly from just over a million rupees prior to 1990 to around Rs40 million in mid-nineties to Rs27.5 million, currently. Many prominent members discreetly tell that they abhor the system of disclosure of buyer and seller at KATS—even if it is post trading— but are not willing to go on record as having opposed the system, afraid lest they be persecuted by those in favour. Mian Nisar Ellahi- popularly known as Nisar Danka-the multi-billion financier, who was regarded to be the main figure behind the May 2000 stock market fiasco, which ended only after at least five brokers in Karachi and Lahore, who traded on his account, had lost all or most of their assets, lamented bitterly that the ‘Karachi mafia’, who brought about his downfall, had access to everyone’s ‘positions’ in the market. In that respect, he said, it was very well that through on-line display of buyer and seller, everybody had a level playing field. Several top players, including some intelligent ones also, however, do not hold much objection to the buyer/seller identification. Their reason the same: “It gives everyone the level-playing field”.
But many floor traders say that the disclosure of members code sparks the ‘herd culture’, as small investors and jobbers watch out for who is buying and selling instead of analysing the merits of stocks by their ‘fundamentals’, such as growth, yield, price-to-earnings ratio, return on equity (ROE) etc. “No wonder trading remains confined to few scrips only instead of being spread over a wider range”, says one trader. Invasion of privacy and the encouragement to speculative trading are the disadvantages cited by the opponents of the identification of buyer/seller code numbers.
But the serious of them all is ‘front-running and manipulation’. One broker explained how this works. He said that the manipulators begin by making huge purchases through non-prominent brokers and brokerage houses. Price may then be raised artificially by purchases made through prominent brokerage houses. When the small traders and jobbers see on-line, the code numbers of such big brokerage houses, they jump on to the band wagon and start pushing buy orders. As the price of the stock shoots up, the manipulator, surreptitiously begins to unload his purchases by selling through non-prominent brokers. “Millions of rupees have been made in this way, all in a single day”, says one floor trader.
But jealousy in all likelihood may also be at the heart of opposition to the disclosure of member code, for such ‘front-running and manipulation’ can only be done by a member who either works with a strong group of brokers or holds more than one membership card- but not by a small broker who operates alone.
In 1998, the Karachi Stock Exchange wrote letters to the following 14 stock exchanges located in countries across Asia, Europe, Australia and Africa: London; Frankfurt; Sydney; Wellington; Johannesburg; Mumbai; Delhi; Dhaka; Chittagong; Singapore; Hong Kong; Jakarta; Kuala Lumpur and Manila, asking them to state if the trading systems prevalent in those bourses, identified buyers and sellers during on-line trading. All except Hong Kong and Sydney said they do not.
Most stock exchanges replied that it was only “after the orders had been matched and trade executed that the buyer and seller came to know who was their counterpart in a particular transaction”. The Delhi Stock Exchange went a step further. It wrote back: “In the normal trading, the identity of the buying and selling broker is not disclosed even after the trading is over”. The reason it cited was to maintain “confidentiality regarding positions of the members”.
The Economic Advisory Board of the present government, soon after take over had assigned the Capital Market sub-group headed by the SBP director Azam Faruque to recommend various capital market reform measures. One such ‘short-term measure’ identified by the sub-group was to shut out the broker information windows, stating that it “violated basic rules of trading confidentiality and integrity”. The Report went on to say: “Although the Securities and Exchange Commission of Pakistan has already advised the KSE to withdraw the KATS broker information windows, post-trade disclosure of member names should also be stopped”. The Azam Faruque report was released on November 29, 1999. Three years looks like pretty long period for a recommendation—if it was sound in essence—to have been implemented.