Market wrap: Regulatory crackdown hits index hard

Benchmark KSE-100 index drops 946 points, finishes below 33,000

KARACHI:

Rumours about a regulatory clampdown against brokers plunged the benchmark index of the Karachi Stock Exchange (KSE) by 946 points, or 2.8%, on Monday.

In line with most Asian stocks, the KSE-100 Index declined sharply in intraday trading and lost as many as 1,129 points. However, it recovered a little later on to close at 32,944.48 points.

Speaking to The Express Tribune, Shajar Capital Investment Analyst Hamza Kamal said the absence of triggers to drive the market has caused selling on the Karachi bourse.

“There is uncertainty in the market and the political situation is volatile,” Kamal said while referring to the ongoing crackdown against white-collar criminals in Karachi.

According to an equity trader working for another Karachi-based brokerage house, individual investors have been selling shares on the KSE after most Asian stock markets experienced bearish trends on Monday.

“Individual investors are panicking and have trimmed their positions,” he said.

Investors are expecting action against brokers after the Securities and Exchange Commission of Pakistan (SECP) recently highlighted the importance of an inspection regime to ascertain brokers’ compliance with all regulatory requirements.

New regulations introduced a couple of months back state that every stock broker must submit a “clients’ assets segregation statement” to the exchange within 15 days of the end of the latest fortnight. In the case of non-compliance by a broker, the regulations state the exchange has the power to switch off its trading terminals.

The segregation of clients’ assets is a critical issue, as the regulator had caught and penalised a number of brokers for using their clients’ money illegally in recent years. A broker uses its clients’ idle funds for either proprietary trading or leverage financing, which is forbidden under the KSE rules. Brokers must keep the assets belonging to their clients separate from their own assets by maintaining separate bank accounts with the word “clients” in the title.

The exchange is actively trying to implement the newly introduced regulation - something that has reportedly spooked some market participants.

However, sources privy to recent market developments believe the panic among retail investors is based largely on misinformation: only about eight brokers have been served with notices to explain their non-compliance with the segregation of clients’ assets regulations.

“These are small brokers with a tiny market share. Investors’ panic is uncalled for,” a source said.

Prices of as many as 332 stocks declined while those of 34 stocks appreciated during the day. Stocks of nine companies remained flat, KSE data shows.

Trading volumes clocked up at 218.4 million shares with the value traded amounting to Rs10.6 billion.

Dewan Cement was the volume leader with 12.2 million shares losing Rs0.87 each to clock up at Rs17.01 a share. It was followed by Askari Bank with 10.1 million shares gaining Rs0.49 each to close at Rs23.63 and Dewan Motors with 10 million shares gaining Rs0.41 each to close at Rs11.61 per share.

Foreign institutional investors were net sellers of Rs791.9 million during the day, according to data maintained by the National Clearing Company of Pakistan Limited (NCCPL). They were buyers of Rs1.3 billion and sellers of Rs2 billion worth of shares, NCCPL data shows.

Published in The Express Tribune, September 8^th,  2015.

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