Investor confidence improving: PSX shows over 200pc growth in terms of volume

Over 200 percent significant increase in trading volumes at Pakistan Stock Exchange (PSX) demonstrates stability and improving investor confidence in the market. Trading data of the PSX shows that since the change of the management at the Securities and Exchange Commission of Pakistan (SECP), trading activities at the stock market have improved significantly and show a growth of 200 percent demonstrating concrete stability in the stock market.

According to the data, the average daily trading volumes on the ready market were 76 million at the start of current financial year, which has now jumped at 260 million in first 10 days of October 2019. Average trading volumes on future market have also increased to over 92 million from 54 million in July, showing raise of 58 percent.

One-minute volume is the number of contracts traded within 60 seconds. High volume is an indication that a market is actively traded that also depicts investors' confidence. High volume means greater reliance can be placed on the movement in price than if there was low volume, because heavy volume is the relative consensus of a large number of participants. High volume indicates an active market; in an active market, the spread between bid and asked prices is usually narrower.

In the last 40 trading sessions, PSX index jumped 5,710 points to close at 34,475 points on Friday, indicating significant growth of 20 percent since August 16, 2019 when the management was changed at SECP. Since then, the market capitalization increased by Rs 885 billion to stand at Rs 6,771 billion at the end of last session.

The possible positive outcome of FATA meeting scheduled in Paris on October 14 and 15 to review Pakistan's measures against anti money laundering and terrorism financing, stabilization in inflation, rupee dollar parity and interest rate are some leading positive factors. However, major contributory factors in increasing trading activity are ease of doing business measures by the SECP for stock market participants.

The new SECP management, immediately after taking charge during mid-August, begun consultation with market participants and take necessary steps to ease the earlier over regulated market. One of important relief measure was removal of haircuts by NCCPL. The 10 percent additional margins being collected from brokers and 10 percent additional haircuts being applied by NCCPL on margin eligible securities were discontinued. Also, the slabs of liquidity margins were revised and made applicable only on large exposures of brokers. Moreover, basic deposit collected by NCCPL from brokers trading in the Deliverable Futures Market (DFM) were permitted to be used towards margin requirements.

The SECP also take practical steps to resolve the long due issue F5 and F8 trading windows. PSX's trading system provides two windows, i.e. F5 and F8, to carry out Sale (with pre-existing interest) and Blank Sale (without pre-existing interest) transactions respectively in DFM. However, due to system limitations at the brokers end they could not determine on real-time basis if a particular sell transaction had any pre-existing interest.

Hence, brokers were unable to trade in the market which curtailed liquidity. Considering this practical difficulty, PSX regulations were amended to enable brokers to carry out Sale and Blank Sale transactions through the F8 window which has resulted in an increase in trading activity in DFM.

In addition, the NCCPL's regulations for Margin Financing were approved to enable unblocking and pledging of margin financed securities. SECP also grant approval for Murabaha Share Financing System to allow financing in Shariah compliant securities. Circular 20 of 2017 was repealed and replaced with Circular 12 of 2019 whereby brokers can pay interest on the subordinated loans and utilize such loans as per their requirements. To relax investors from undergoing repeated KYC exercise, the SECP devised and enforced regulatory framework for Centralized KYC Organization was revised to facilitate investors and bring efficiency in the process.