Good tidings at the bourse

Pakistan Stock Exchange is undergoing a major transition. Following its demutualisation and strategic stake sale to the Chinese last year, its recently appointed CEO, Richard Morin, says his single biggest target is to increase number of retail investors in the market to at least half a million, if not a million in three years.

In an interview published today in this paper’s Brief Recording section, Richard has spelled out the details of his plans, central to which is the need to build technical and organisational capacity at the exchange. And both are long overdue.

In recent months, some traditional PSX brokers have been irked by the bourse’s plans to get a new trading system. The question “why do we need such an expensive new system” is often raised in a complaining fashion.

What these brokers do not seem to realise is that a typical exchange ensures it has a new generation of trading system about once in every five years. The last time Pakistan Stock Exchange (previously Karachi Stock Exchange) invested in a trading system was 20 years ago. Considering that the core business of an exchange is listing and trading shares, the need to replace the 20-year old technology hardly needs to be emphasized.

Likewise, there is a crucial need to boost organisational capacity at the bourse. Even until recently, the PSX had a department called Product Development Research and Marketing Department that was responsible for all things its name comprises of. That’s like having a pharma company whose R&D and sales team are one department.

Not having the right organisational capacity is one of the key reasons why the PSX has not been successful in launching new products in the past. Case in point, the fact that the bourse has been talking about ETFs since 2012 but nothing has happened.

While an ETF is not a PSX product, as a bourse it needs to have systems in place for its trading. It also needs to coordinate among authorized participants, market makers, among many other players; it also needs to ensure that the asset management companies that will launch the ETFs understand those products. This means unless the bourse has a dedicated resource for ETFs who will do ETFs in the morning, and ETFs in the evening, the product will not take off.

Those who complain that a foreigner might not understand the ‘local stock market culture’ should know well that in our culture things don’t move. And if that’s the culture the traditional brokers want to support, then they should brace for impact.

The PSX’s latest owners and its latest CEO mean business in their commercial plans to turnaround the bourse. And surely the PSX won’t be the first bourse to be transforming into a professional exchange. Examples abound in both developing and developed world, how once brokers’ clubs have eventually been transformed into viable commercial market where firms are eager to list their equity and debt securities for access to cheaper capital.

Those who belong to traditional brokerage mindsets still relishing the past should better start swimming or they will sink like a stone.