Is there a need for 4th stock exchange?

Depending on how you look at it, the answer has to be 'yes' and 'no'. But the question has been at the heart of controversy since the middle of February, when the Securities and Exchange Commission of Pakistan (SECP) granted a licence for setting up what essentially would be an electronic stock exchange to PEX Limited – an ECN owned by Jehangir Siddiqui, a stock broker turned investment banker.

Most other stock brokers have been up in arms. They argue that the existing three exchanges at Karachi, Lahore and Islamabad, is already a crowd. A week ago, when angry brokers gathered in the auditorium of the Karachi Stock Exchange, many were itching to burn Khalid Mirza, the ex-chairman, SECP, in effigy.

Their reason: He had approved the ECN, surreptitiously and signed the licence on February 14, his last working day, before he boarded the plane to Washington to take up his World Bank job. Did he? In an interview with this scribe from Washington DC, Mirza brushed aside such allegations saying that his was just one of the four votes cast in favour among the five top men at the SECP voting on the issue.

Why did he grant registration to PEX Limited, brokers question, insisting that it was to favour a friend. Was it? There were no advertisements in papers calling for proposals, of course, but Mirza says – and many brokers admit – that the SECP boss had been goading many senior brokers for no less than two years, to submit proposals for ECN, but no one except PEX did.

The ex-chief regulator has also advised existing stock exchanges and brokers that instead of taking up the cudgels, they ought to take stake in PEX or to submit proposals for more ECNs. He also says he wouldn't mind if there were a thousand stock exchanges in Pakistan, but brokers insist that the statement contradicts SECP chairman's earlier stance, whereby he had been renegating on applications of setting up exchanges at Multan, Faisalabad, Peshawar and Quetta. “The Regulator had even insisted that all the three existing stock exchanges merge into one”, says an irate broker.

ECNs or Electronic Communication Networks are described as electronic trading systems that automatically match buy and sell orders at specified prices. In US, there are around 11 ECNs and two of them have been given the regulatory status of a stock exchange.

“ECNs are simply a market place in cyber space where anyone can buy and sell stocks without involving a third party”, says an international player familiar with the technology. Since ECNs directly link buyers with sellers, cutting out the mediators, it would reduce mediation costs and possibly bring greater faith in the transparency of the deals.

No one really has a problem with ECN, and setting up one does not require a regulator's permission either. But giving it the status of a stock exchange that would have the ability to trade electronically round the clock is what has irked brokers. They fear that it would hit at the heart of business as well as membership card of the 300-strong stock brokerage fraternity; the market price of the card now running upto Rs 30 million. And stock brokers contend that they charge commission between 0.2 to 0.5 per cent of the traded value, which is not higher but at par with international standards.

It is also doubtful whether the possible plunge in membership cards-as has been suggested by the SECP chief-is the reason to turn brokers against PEX, for the sum is pittance for some of the big brokers, who are leading the pack of dissenters. “All other things set aside, it actually is the 'ego' of the broker community that has suffered the deepest cut”, agrees one observer.

And that seems to be the problem everywhere. The SECP authoritatively dismissed KSE's objection and a plea to be heard on the matter, saying that granting of such a registration under section 5 (2) of the Securities and Exchange Commission Ordinance, was the “prerogative of the Commission” and it was not the “domain of the Board (of directors of the KSE) to question the regulatory authority of the Commission”.

Khalid Mirza also says that he had invited the representatives of the three stock exchanges at the presentation of proposal made by PEX in Islamabad on February 10. But the KSE says: “The very first letter of SECP dated Feb 6, 2003, addressed to the three stock exchanges did not disclose that the presentation was for the establishment of the fourth stock exchange, rather it was a presentation on ECN”.

Proprietor and directors of PEX have adopted a policy of silence. But unconnected people in favour say that the fourth electronic exchange would end the 50-year old monopoly of stock brokers on the market; traders who can not afford to purchase costly brokerage licences would also be able to directly buy and sell; it would reduce transaction costs and is also a technologically feasible idea.

Impartial observers suggest that if the new electronic exchange could add value to the existing exchanges, it shouldn't be a bad idea, at all. But the KSE management says it has already taken steps towards online trading. The KSE told a meeting of the Board on March 6 that various development tasks including introduction of internet trading and automation was in progress.

“Had the SECP given an opportunity to the KSE management to present their viewpoint on ECN as an exchange, they would have strongly argued in favour of launching of ECNs by existing stock exchanges and as well as reduction of costs of trade”, the KSE managing director told the directors at the March 6 meeting.

At the end of the meeting of the Board of Directors of KSE last Thursday, the members voted by a majority of five-to-one, with MD abstaining, to take the battle of granting registration to PEX to the courts. The debate would doubtless, be around the question whether or not the fourth stock exchange is in the “interest of trade and public”.

But it would scarcely make sense to open up the matter before the honourable judges. There are sure to be skeletons in every cupboard and no one would like them to drop out. Some sort of agreement outside the court is therefore, a more likely prospect. Whichever way things turn, Khalid Mirza, who-in his three-year term- was almost always at odds with the broker community would long be remembered by them, as a Regulator with many surprises up his sleeve.

After the KSE turned out to be 'the best performing market in the world during 2002', there was a thaw in the Regulator-broker relationship, which some thought edged almost on friendship. But the controversy that has been generated by his final act, before bowing out, has stunned the brokers and possibly sent Mirza laughing all the way to Washington.

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