KARACHI: The Pakistan Stock Exchange (PSX) is determined to promote retail trade in the debt securities market through its platform in 2022, PSX CEO Farrukh H. Khan said.

Speaking to Dawn in a recent interview, the head of the country’s only bourse said the PSX has brought on board 12 banks as market-makers to ensure retail investors have easy access to the debt securities market.

Equity investors can theoretically buy and sell debt securities, ranging from private companies’ bonds and sukuk to government-issued treasury bills, on the PSX platform. However, the daily volume of debt securities traded on the PSX is negligible for a variety of reasons.

“We put in place all the building blocks in 2021. We’re integrating our system with those of the market-

makers. Next year, we’ll generate activity in both primary and secondary markets for debt securities,” said Mr Khan.

Farrukh says lack of liquidity has prevented retail investors from taking exposure to the market

Inadequate understanding of debt securities among the client-facing employees of brokerage houses is one of the main reasons for low trade volumes, he said. But more importantly, lack of liquidity owing to the absence of counterparty has prevented retail investors from taking exposure to the debt market, he said.

“Market-makers will soon be putting up bid and offer rates for all sorts of debt securities, ensuring that the counterparty is always available if a retail investor wants to trade,” he said.

In addition, Mr Khan said 2022 will witness the launch of at least one fixed-income exchange-traded fund (ETF) – an asset class consisting of a basket of different securities that retail investors can buy and sell just like a single stock. It’ll allow stock investors to divert their investments to fixed-income securities like bonds and sukuk as soon as they decide to reduce their exposure to the equity market for whatever reason, he added.

Foreign selling

According to the data compiled by Arif Habib Ltd, foreign ownership of shares as a percentage of free-float market capitalisation is hovering at a 10-year low of around $2 billion, thanks to the incessant selling by overseas investors.

“Instead of growing, our stock market size has gone down in dollar terms from $100bn to $50bn in recent years,” he said, noting that devaluation has played a major role in it. In addition to stock valuations, foreign investors also look at liquidity and the market size before making decisions, he added.

“We often forget that the PSX has mostly old-economy stocks. These stocks trade at lower [price-to-earnings] multiples than new-economy stocks everywhere in the world... our valuations are definitely low but they aren’t as low as many people like to believe,” he said.

Low volumes

The PSX launched the Growth Enterprise Market (GEM) board in 2021, which is a separate counter reserved for new and growing companies carrying higher investment and liquidity risks than mature companies listed on the exchange’s main board.

However, the two GEM-listed companies have received low volumes since their public offerings towards the end of 2021. Brokers have attributed the subdued activity in these shares to the regulator’s requirement that only institutions or accredited individual investors with net assets of at least Rs5m can trade on the GEM counter.

“Volumes will grow once there’re at least five to 10 companies on the GEM counter,” said Mr Khan, adding that the condition of net assets of at least Rs5 million is both “low” and “reasonable”.

Brokers have demanded that there should be “no disparity” between ready and GEM counters as the screening and documentation procedures for accredited investors increase the brokers’ cost of doing business.

“Developing the understanding of a new product always takes time. Brokers should make an effort to better understand it,” he said, adding that brokers are required to just check one box online after their clients self-certify as qualified investors.

As for the botched rollout of a new trading system in October, Mr Khan said it had issues in its front end that were “completely unexpected” because they never showed up in mocks.

Bought from China’s Shenzhen Stock Exchange at the price of RsRs461.2m, its implementation led to thin volumes in subsequent trading sessions. Users complained about the absence of basic features and frequent glitches causing trade execution delays. Following protests from a majority of brokers, the PSX restored the old system until the bugs in the new one were fixed.

“We’re committed to the new system. We’ll reintroduce it in two to three months,” he said.

Published in Dawn, December 26th, 2021