In order to remove fragmentations in the price discovery and order execution mechanisms existing amongst the three stock exchanges of the country, MD LSE has urged the Securities and Exchange Commission of Pakistan to retain the spirit of Section 8 of the Securities and Exchange Ordinance 1969 in the Draft Securities Act, so that a ‘Unified Order Book’ or ‘National Market System’ can be immediately introduced in Pakistan.
MD LSE has stated that Section 8 of the Securities and Exchange Ordinance 1969, had vested the powers in the Commission to promulgate Rules whereby the Commission could prescribe the manner for the execution of transactions on any exchange by any person. He said that Section 8(1) of the S&EO 1969 was changed during 2006 whereby the Commission had intended to introduce the spirit of prescribing of a ‘Unified Order Book’ for the exchanges in the country. He said that under the previous version of Section 8(1), no person could trade on any on any Exchange unless he was a member thereof. He said that the purpose of the change was to change the context of trading on any stock exchange by a member of the same stock exchange into the execution of trading on any exchange by a member of any other exchange. He said that the said section empowered the Commission to promulgate Rules to order the inter-connectivity of the trading platforms of the domestic exchanges so that the orders from one exchange could be executed on the platforms of another exchange. He said that unfortunately, despite having such an enabling clause since 2006, no progress was made towards the establishment of a unified market system in the country because of the pending demutualization process of the domestic exchanges. However, he said that, since the demutualization of the exchanges has already taken place and since the members of the exchanges have already been given monetary compensation in the form of shares based on the asset valuation of the respective exchanges in exchange of surrendering their ownership rights in these exchanges, therefore it had become imperative that the matter of unification of the order books of the exchanges could be proceeded. He said that it was because of this reason that LSE had been inviting the attention of the Commission to end the shortcomings in the present way of executing the ‘inter-exchange trading’ between the members of the three stock exchanges. He said that very recently, the Commission had nominated a committee, comprising of the three stock exchanges, CDC and NCCPL’s management, to address these shortcomings and the Committee’s report is expected shortly. He said that LSE fears that the new Securities Act being debated at the Parliament level may not contain any such powers for the Commission, which would result in the continued fragmentation of the trading platforms of the domestic stock exchanges because of which LSE has highlighted this matter for the timely attention of the policy makers and the parliamentarians.
MD LSE stated that unlike the full-scale merger of the exchanges of the country, which may create a humongous and an arrogant monopoly of a single exchange, the unification of order books of the exchanges would enable in the best interest of the investors and the issuers alike. He said that since the draft Act contains the provision for the licensing of new exchanges, therefore in order to ensure the continued interest of the investors and the listed companies, it was best to introduce modern legislation which would neutralize the domination of any one exchange in the country. He said that the exchanges are fundamentally the ‘public-interest utilities’ and as such need to adopt modern inter-connectivity principles as being practiced and regulated by the telecom, banking and airline sectors, where a consumer, irrespective of the choice of the service provider’ is ensured non-discrimination.
MD LSE explained that the present system of different order books/trading platforms offered by three stock exchanges is detrimental to the investors and is acting against the basic rights of the investors to obtain ‘best-price’ and ‘faster-execution’ of their trading orders in Pakistan. He explained that the investors trading through the members of LSE and ISE fail to get the best price due to low liquidity in the trading platforms of these exchanges. He said that since both of these exchanges conventionally service the retail clients, therefore there are always price-mismatches in the value of scrips existing amongst the most liquid stock exchange of the country-Karachi Stock Exchange and the other two stock exchanges. He said that already in 2007, ISE and LSE had combined their trading platforms, however KSE had refused to act in the best interests of the investors and had not accepted the rationale that being ‘public-interest utilities’ the fundamental duty of our exchanges was to ensure ‘best-price’ and ‘faster-execution’ to all investors irrespective of from where the orders were originated. He said that for this purpose, both LSE and ISE had proposed an access mechanism based on the ‘market-access fee’ to KSE but KSE had refused to join hands.
MD LSE further said that after the demutualization of the exchanges, there is no merit in continuing with the old system and especially when the brokers of the exchanges can’t claim to manufacture the ‘best-price’. He said that the best price of a listed security is achieved through an anonymous auction like process of the investors orders and the brokers act only as the intermediaries for forwarding these trading orders from the investors. He said that accordingly, no exchange can claim to have a monopoly on the ‘best-price’ of the scrips. MD LSE has stated that all other advanced regions of the World, like USA and Europe had, in the best interest of the investors, introduced modern regulatory changes to end fragmentations existing in the order-books of their exchanges by requiring the exchanges to inter-connect their trading platforms so that the investors could get the best price of the securities traded irrespective of the choice of the trading venues (exchanges) or the intermediaries (brokers). He said that the policy makers must refer to the National Market System (NMS) of USA and MiFid regulations of the EU and adopt the spirit of such regulations in Pakistan as well, for which the retention of the powers with the Commission to prescribe the order execution mechanism as per the existing Section 8(1) of the S&EO 1969 is a must.
