The drama that is MTS

These are bad times to be a stockbroker in Pakistan. Volumes are at a multi-year low (and so their earnings), market confidence is lower, and overall liquidity in the economy is also at its ebb.
To top it all off, margin trading, the new and supposedly improved leverage system to which most market participants have pinned their hopes is also in a limbo - thanks to the reservations of the KSE Chairman Zubyr Soomro.
But its not as if Soomros arguments are ill-founded. The former Citibanker is apt in pointing out the underlying risks in the proposed system, especially those relating to default and transparency at the time of financing. Clearly, the market can ill-afford a repeat telecast of the leverage-driven or leverage-amplified crisis seen in the yesteryears.
Reportedly, according to some sections of the press, many of the reservations have been resolved between the SECP and KSE officials, two/three of the most contentious ones remain. Some brokers are hopeful that the remaining issues will be resolved in a weeks time, others, some 65 of them, according to last reports, were busy signing a resolution to get Soomro out of the way.
Whether they will succeed or not, its difficult to say at the moment, but the odds seem to be in Soomros favour. A little birdie told BR Research that the SECP itself is a supporter of Soomro and his set of reservations that highlighted the weaknesses in the proposed Margin Trading System (MTS).
Yet brokers adamant behaviour is difficult to comprehend - after all in 2008/09, it was the same broker community that had signed off against the risky leverage system then in place. So, if a relatively independent person wants certain inherent risks to be removed, then brokers should embrace it and get the right thing done.
Interestingly however, just as KYC, one of the measures asked by Soomro to be incorporated in the proposed MTS system, is being seen as a formality by certain brokers, "the margin product itself appears to be a formality", according to one market participant.
Thats because economic fundamentals are shaky amid expectations of further policy rate hike, 100 bps according to Standard Chartered Banks latest report, in the ongoing fiscal year.
Margin products help reduce volatility by making the market more liquid which results in better price discovery. Liquidity itself, does not give the market any direction, but it surely gives it the necessary momentum to rally in either direction, upwards or downwards.
So, when economic fundamentals are weak, wouldn launching a leverage system to provide more liquidity be self-inflicting? Because if there is one thing preventing the market from falling further, aside from the foreign buying, it is lack of volume i.e. lack of momentum. If volume ticks up due to leverage, there are risks that downward momentum would gather steam, as the process of price discovery would become more efficient. Now, thats a risky proposal.
On a side note, would somebody in the SECP mind inquiring the real face of foreign portfolio investors in Pakistan? Implementing KYC for foreign portfolio investors along the lines of that implemented in India, would be a great idea.