KARACHI, May 23: Behind closed doors, the management of the Karachi Stock Exchange (KSE) — all through the day and well into the night — remained embroiled in sorting out the intricacies of the badla transactions.

Some market players questioned whether it really was the business of the bourse to broker the badla deals.

“My feeling is that the badla issue will not be resolved until the stock exchange stops being a player in the matter and lets the badla providers and the badla users to settle their matters bilaterally,” says Professor Iqbal Ismail.

He says that arranging for financing of trade and creating the infrastructure to facilitate trade financing was not a proper function of the stock exchange.

In his daily report, the professor makes a caustic remark: “All over the world this is a bilateral matter between the financiers and the market participant. We may be the only exception by virtue of our unique evolution.”

It all started on Monday, when the average badla (carryover transactions or COT) rates shot up from 12 per cent to 85 per cent and the stock exchange put a cap on the maximum rate at 24 per cent per annum. That prompted badla financiers to move to the sidelines.

An analyst at brokerage Taurus Securities says that due to the withdrawal of funds from badla market by financiers, the market was facing difficulty in clearing, i.e. traders with long positions, especially in weaker stocks, were not being able to carryover their positions due to shortage of financiers in those stocks.

“As a result, the KSE took on the role of bridging shortfalls in individual stocks, by forcibly allocating financing positions in those stocks to brokers in proportion to their positions before they withdrew their funds,” the analyst said.

But there also is the argument whether, left to itself, the badla rates, which had shot through the roof at 150 per cent in some core stocks, would have been manageable?

A market player believes that it was a problem of a single day. “There would have been a bee-line of financiers to provide funds at such phenomenal rate, which would have settled the matter by itself,” he says, adding where was the need for the Exchange to ‘don the cap’?

A senior analyst at InvestCap admits that on hindsight, the argument holds water. But at the moment on May 20, the bourse’s decision to arrange badla of all those who were unable to get their trades carried over by proportionately distributing lending amongst all financing participants, could have been prompted possibly by the anxiety to avoid yet another badla-induced crisis.

He says that one lesson that investors have learned from the history of capital markets in Pakistan is that the settlement uncertainty is a greater cause for concern than even a war.

On Wednesday evening, the Exchange had announced that there would be no badla session on Thursday. The first of the two circulars issued by the KSE on Thursday informed about the closure of the market while the second listed a series of seven “decisions taken to resolve the members back office issues and smooth resolution of COT (badla) transactions”. It said that the COT session on Thursday would be between 8 and 9pm — which many thought were strange late hours.

The analyst at InvestCap says that a small investor base (around five participants controlling 95 per cent of the badla market) had enabled players to manipulate it and that was why managing the affairs of badla was, and would remain, a headache for the exchange’s managers.

The bitter pill prescribed by the analyst is to ban the badla business altogether, as was done by the neighbouring county last year.

Of course, the volume of transactions would plummet, for a time, to perhaps a tenth of the current average daily volume, the analyst agrees, but hastens to add it is the bitter pill which must be swallowed to solve the ever emerging problem of uncertainty and mayhem in the

market.