PSX set to increase stock price cap to 7.5%

Limit will be raised gradually with effect from January 20

KARACHI: Pakistan’s stock market is set to relax rules in an attempt to accelerate trade activities as it has decided to increase the maximum limit on rise or fall in an individual share price to 7.5% in a day from 5% at present. The limit will be increased gradually with effect from January 20.

Besides, the market is ready to welcome the launch of two exchange-traded funds (ETFs), which will include a basket of around 10 selected stocks each and their units would be available for trade like shares of companies listed at the Pakistan Stock Exchange (PSX). Long-term traders usually invest in ETFs globally.

“The existing circuit breaker of 5% or Re1, whichever is higher…shall be enhanced by 0.5% every 15th day till the time the circuit breaker reaches the level of 7.5% or Re1, whichever is higher,” PSX GM and Acting Chief Regulatory Officer Abbas Mirza said in a notice recently.

The revised limit will stretch the band of two-way price movement to 15% as a share could move up to 7.5% upwards and 7.5% downwards from the last closing price on working days.

The exchange has decided to revise the cap and floor pricing limits of stocks at the time when the benchmark KSE-100 Index is anticipated to increase by a massive 20-25% in the new-year which started on January 1, 2020. The expected pick up in economic activities in 2020 would support the rally in the year. The market increased 10% owing to return of stability in the economy during the year ended December 31, 2019.

“The enhancement of circuit breakers would allow true price discovery on a relatively faster pace,” PSX General Manager Product Management and Research Hassan Raza said while talking to The Express Tribune.

There is a hot argument in the market over why the increase in share price is capped at 5% while it has the potential to make larger gains. For example, if a share, priced at Rs100, has potential to surge by Rs20 due to some material developments, the exchange should play a role to help the share price reaching its true value sooner than later, he said.

“Such limits for individual stocks are set at 10% in most of the markets around the globe,” he said.

The circuit breakers were introduced at world to apply curbs in order to reduce market volatility and massive panic sell-offs, giving traders time to reconsider transaction. The New York Stock Exchange introduced the limits after observing Black Monday in 1987.

There was a time when such circuit breakers stood at 10% at PSX years back. However, the limits were first reduced to 7.5% and then to 5% at the times when the market was caught in huge crisis of confidence and record steep declines every day in 2008.

Index-based market halts

Besides, the trading would come to a halt at PSX in case the KSE-30 Index moves either way by 4% from its opening index values with effect from January 20.

Later on, the market would freeze when KSE-30 Index hits 5% from the time once the scrip-based limits are fully enhanced to 7.5% compared to 5% at present.

“Where KSE-30 Index moves 4% (these days) or 5% (later on), as applicable, either way, for consecutive 5 minutes, market halt shall apply for 45 minutes. It may be noted that market halt shall not be applicable in case KSE-30 Index moves beyond 4% or 5% as applicable in the last 1 hour of the market,” Mirza said in the notification.

Launch of ETFs

Raza said National Investment Trust (NIT) and UBL Fund are the two asset management companies which are poised to launch the exchange-traded funds (ETFs) over the next two to two-and-half weeks. In case the launch gets delayed due to a couple of regulatory approvals in pending, the funds should be available for trade maximum in four to six weeks, he said.

JS Global would perform the function of market maker, meaning it would remain available to buy and sell units of the ETFs at every points of time though PSX trading platform. “ETF units would be available for trade like share of firms at PSX,” PSX GM Product Management and Research said.

The unit price of ETFs would be average price of all the expected 10 stocks in the basket. The diversified stocks in ETFs portfolio help investors mitigate risk factors. 

Published in The Express Tribune, January 3^rd, 2020.

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