The Securities and Exchange Commission of Pakistan (SECP) has proposed that the existing circuit breakers on individual stocks of the Karachi Stock Exchange (KSE) should be replaced with a cap on the benchmark index. According to the new plan, the limit will be on indices, said SECP Chairman Salman Shaikh while speaking to The Express Tribune on Friday.
This move would improve risk management and attract investors as it would help them in terms of entry and exit in case of unusual market movements, he explained. Shaikh said that the proposal is still in its infancy and “a lot needs to be discussed before we reach a decision.” He added that all stock markets of the world apply that and “it is a standard international rule.”
The SECP chairman will meet Karachi Stock Exchange Managing Director Adnan Afridi on Monday to discuss the issue. According to the circuit breaker rule the KSE currently follows, individual stocks worth more than Rs20 have a limit of five per cent at the upper and lower levels while cheaper stocks have upper and lower limits of Re1.
This means that if a stock opens on a new trading day at Rs50, it can fall or rise by Rs2.5 (five per cent) and cannot cross the limits until the end of that particular day. Similarly, a penny stock worth less than Rs20 can only be traded for one rupee above or below its opening value and cannot go beyond this limit.
The SECP’s proposal will change rules and impose a limit on the index at a time when the going is good for the market. Yaseen Lakhani, a member of the KSE’s board of directors, said that he was not aware of any such proposal being considered. He said that the implementation of any proposal by the SECP was not possible unless reviewed by all stakeholders.
KSE’s Deputy General Manager of Operations Baber Mirza also denied having knowledge of any such proposal. He said that KSE members have not met with any officials of the SECP for the suggested trading limits. An analyst, on condition of anonymity, said that such a decision would prove disastrous for both the exchange and the investors. He said that freezing the index instead of individual stocks would lead to mayhem as any heavy movement within the pool of moving stocks (volume leaders) would lead to other securities being affected.
The analyst recalled the crash of 2008 when a “floor” had been imposed on the KSE. Restriction on downward movement and fixing the index at a level had led to the KSE sliding down by 42 per cent in 19 weeks. He was of the opinion that the SECP’s proposal of a halt to trading for two or three hours was ridiculous and predicted that investors would likely reject the proposal.
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