Financiers, brokers enjoying win-win position

One of the simplest characteristics of the bourses all across the globe is that some investors make smart profits while others lose money in the speculative equity markets. But, there are some permanent profit-makers i.e. brokers and financiers who are always in a win-win position whether the markets are rising or falling.

The position of the financiers and brokers would become more secure than ever thanks to the SECP’s recently introduced revised Risk Management System (RMS) that was otherwise generally believed to protect the interests of investors, leading analysts observed.

On the other hand, member brokers want the stock exchanges more speculative to earn maximum deceptive profits rather than making markets crystal clear, that is why a number abrupt changes have been introduced at Karachi Stock Exchange (KSE) from time to time following number of meetings held between the officials of SECP and KSE, analysts added.

In both the cases – SECP’s reforms and brokers’ speculative business – brokers and financiers are in win-win position.

Financiers e.g. brokers, banks, mutual fund companies, financial institutions etc, always acquire high rate of return on the financing that is presently set at 10 per cent plus one month KIBOR (Karachi Inter Bank Offered Rates) at 19.78 per cent maximum for the ongoing month for Continuous Funding System (CFS).

In either case, as investors earn profits on funded securities or lose money, financiers are sure of getting good rate of return. And brokers definitely collect fees on each transaction investors make at their KATS terminals.

In case investors earn profit on funded stocks they themselves pay the rate of return on financing in other case brokers give margin calls to recover the funded money through them, it is normal practice at the bourses and KSE is not an exception.

Banning in-house badla and converting it to regular CFS is aimed to minimize speculation, making funding documented and market transparent, while the business of some of the brokers and mutual funds besides banks is to provide financing to speculators.

The newly introduced risk measures i.e. improved exposures and enhanced margins under VAR (Value at Risk); Special Margin Regime; putting ban on overall netting; prohibiting in-house financing and enhancing CFS cap with more eligible scrips etc commonly give a sense of protecting financed funds and brokers, analysts believed.

Therefore, SECP decision that members of stock exchanges, executing ‘ready market trades’ on behalf of approved financial institutional (FI) clients, shall not be required to place margins with the exchanges, is to protect brokers from defaulting and bankruptcy.

In the new risk management system, none of measures are defined as pro-investor.

As such these reforms would address the default risk instead of mitigating market risks inherent to the bourses.

It is widely believed and observed that volumes would further shrink in the aftermath of making trading more technical, difficult and complicated.

Source: The News