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AN interesting series of developments is taking place around the stock market these days. I believe this is the first time we are seeing the regulator getting tough with brokers exactly at a time when the market has been on a sustained bull run, breaking all barriers to reach an all-time high. Historically, the power the brokers have exercised over the regulator has been considerable, allowing them to get away with the feeling that they are free to flout regulatory constraints with impunity, and engage in manipulative trades or over leverage to their heart’s content with little fear of consequence.
In 2005, for example, even after the fiasco of the massive crash in March, leading to two separate inquiries, one of which was under a judicial commission that found massive evidence of manipulative trades leading to the crash, the broker community was able to organise quickly and unanimously reject the appointment of a chairman for the stock exchange who was nominated by the SECP.
More than one SECP chairman has been pushed out of his position after running afoul of the brokers’ interests, leading to a situation where the regulators have been so anaemic that they were powerless to first sober sentiment down in the run-up to the giant crash of 2008, and subsequently too powerless to stop bogus companies from floating IPOs on the stock exchange, causing losses in the billions for some state-owned companies who were strong-armed by powerful brokers into purchasing the worthless shares after floatation.
But this time we have an unusual situation. We heard of four brokers who have gone bankrupt as the stock market climbed, and have run away with their clients’ money. According to one report in a newspaper, the figure might even be six.
Traditionally, brokers go broke (no pun intended but what the heck) when the market drops. This must be the first time we’re hearing of the opposite. It takes a special sort of smarts to go bust in the middle of a historic bull market!
One brokerage, by the name of YS Securities and Services in Lahore, had so many complaints filed against it by clients that the SECP filed criminal charges against its director and CEO, Farooq Younas Khan, director Muhammad Junaid Ahmed and former director Muhammad Zulsham Younas Khan Sherwani, as well as forwarding a complaint about them to NAB.
The message going out to brokers is ‘don’t play with money you don’t have, and don’t even think about gambling with money taken from clients’.
So this time the SECP is not playing soft any more. They are taking action, urging the management of the Pakistan Stock Exchange, which is the frontline regulator tasked with monitoring more day-to-day operations of the exchange, to play a more proactive role in ensuring that brokers are not overextending themselves, and in at least one case, they have ordered NAB action against AWJ Securities, whose owner Hassan Waheed Khan has been arrested. Five other brokers are “under observation” because their operations also appear to be teetering on the brink. Basically, the message going out to brokers is ‘don’t play with money you don’t have, and don’t even think about gambling with money taken from clients’.
In some reports, the SECP is still taking fire for being too soft. In one report, for example, they have been castigated for not ordering more punitive action against defaulting brokers. So unlike the past, when the SECP chairman found himself facing a bizarre series of crises that would rain down upon him from a clear blue sky if he had the gall to move against the interests of the broker community, this time the chairman is being called out for not being hard enough.
Until recently that is. The chairman of the Senate Standing Committee of Finance has gone out of his way to publicly attack the SECP for hampering the stock market and accused him of forcing brokers to sell their shares “to bring stock market down” [sic]. He has promised a hearing, which is scheduled for March 8.
One hopes that when this hearing is held, the chairman will listen carefully to what the SECP has to say because the interest of small investors is paramount in regulatory affairs. If regulators are not going to be looking at brokers’ handling of their clients’ money, then what are they there for? There is a practice known as ‘in-house badla’, a form of illegal borrowing through which brokers can borrow against a client’s money and multiply their investments many times over while taking on a level of risk they are not prepared for, which has to be stamped out. It was the bane of the stock market throughout the boom years of the 2000s; it lay behind the crash of 2005 and 2008 as well.
The MD of the Pakistan Stock Exchange tried to put a positive spin on the efforts to stamp out badla financing by arguing that today they detect only Rs10 billion under badla while Rs14bn are held under the Margin Trading System, which is the legitimate channel for leverage for brokers. But to me this sounds exorbitant.
Almost 10 years after the crash of 2008, we can still say that badla finance is 70pc of MTS. This figure ought to be in the single digits by now, and far from finding comfort in it, the PSX MD should be seeing it as a serious problem.
Let the regulators do their job. They will have to step on a few toes and curtail some brokers in the course of ensuring that illegal and untenable practices are curbed, and some will necessarily raise a fuss about this. But a sound market is more important than a growing one, and the only way to get that is if the regulator is empowered to penalise brokers when they break the law in their fevered pursuit of a quick buck.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, March 2nd, 2017
