Stockbrokers lose faith: Cancel licences at PSX

The stock trading industry in Pakistan is facing a gradual decline as at least eight stockbrokers have applied to cancel their licenses at the Pakistan Stock Exchange (PSX) this week. The combination of high interest rates, political drama, economic uncertainty, government mismanagement, and an aggravated economic situation has left stockbrokers disappointed.

Speaking to the Express Tribune, former Secretary General of the Pakistan Stock Brokers Association (PSBA), Adil Ghaffar explained that the significant drop in stock prices during the economic slowdown has caused many stockbrokers to suffer losses. Regulators issue margin calls to stockbrokers when the market declines, requiring them to provide additional cash to avoid defaulting on payment to their clients. “The margin calls have led many brokers into losses, and they have chosen to give up trading rights before defaulting on payments to their clients.”

Ghaffar further highlighted that the stock trading business declines whenever the central bank increases its key policy rates. With the interest rate currently at a record high of 21%, people feel more secure investing their savings in fixed deposits at banks rather than taking risks in the stock market.

“People came to the market to take bet on risk or reward when the rate was standing at 6%. The market’s fall began when the rate went beyond 6%,” he said.

Serving Secretary General of the PSBA, Bilal Farooq Zardi, projected that around 10-12 stockbrokers may relinquish their trading rights this year out of the total of 192 stockbrokers who renewed their licenses in November-December 2022. He noted that around 30-35 stockbrokers had already left the business in 2022 due to the economic meltdown.

Zardi also highlighted the decline in the number of stockbrokers since the demutualisation of the PSX in 2017. From around 400-450 stockbrokers at that time, the number has reduced to 192 as the increasing cost of doing business and challenging practices have made stock brokering less viable.

Finance Minister Ishaq Dar recently mentioned that the market capitalisation reached $100 billion during the previous government of PML-N in 2017. However, the market capitalisation has now dropped to $22.2 billion. The four-and-a-half-fold drop indicate the significant decline in the PSX over the past six years amid economic fluctuations.

The stock market has not been able to regain its peak levels since reaching a record high of close to 53,000 points in May 2017, primarily due to recurring economic crises. The presentation of a populist and unrealistic budget for 2024 in the national assembly last week added to the selling pressure on the stock market, with commentators labelling the budget as “neutral to negative” for the market.

The PSX benchmark KSE 100-Index trimmed 0.16%, closing at 41,301 points on Friday, marking a significant distance from its all-time high of around 53,000 points in 2017. The market’s price-to-earnings ratio currently stands at three, compared to an average of 7-8 multiples in the past.

Zardi mentioned that trading volumes have significantly declined at the PSX, with an average of 100-120 million shares traded per day, compared to 400-450 million shares during better times. Trading volumes directly impact traders’ earnings, as they charge fees on each trade.

“The volumes hit a record high of over one billion shares over a couple of days in 2021 on some good happening on the days,” he recalled.

Additionally, regulatory directives requiring brokers to increase their capital from Rs65 million to Rs70 million by July 1, 2023, and further to Rs75 million by October 1, 2023, have increased the cost of doing business for stockbrokers. The multiple stages of KYC (know your client) requirements imposed on brokers have also raised administrative costs. While stock trading remains a well-documented business, Zardi suggested that the regulators should consider accepting the KYC done for opening bank accounts as sufficient.

Published in The Express Tribune, June 17^th, 2023.

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