KARACHI, Nov 22: With the Karachi stock market ‘floored’ for nearly 90 days -- the longest ‘peacetime’ closure of a stock market in the world --, the space for maneuvering in the ready/cash market remains much too small. But the ‘off-market’ is a place that provides the lemon, which some say the men of means utilise to make a lemonade.

In the ready/cash market, where the KSE-100 index has been plugged at the level of 9,144 points since Aug 28, about an average of 0.01 million shares a day changed hands last week. That represented just a shade of incredibly huge volume of trading that the market was accustomed to seeing until April this year.

But with no bar and no floor on the price level in the off-market, stocks sold at an average discount of 31 per cent to the ‘floor’ price. That represented a widening of lower-than-floor-price by an average of two per cent from 29 per cent since the previous week. And the average daily volume in the ‘grey’ (though absolutely legal) market rose by a significant 106 per cent to a huge 8.0 million shares of the value of $4.7 million. Average volume the week before was also significantly large at 3.9 million shares.

“Distress sale” of MCB at discount of 55 per cent and PSO at 60 per cent the previous week by two foreign hedge funds that were into liquidation, had created a great deal of anxiety in the minds of investors.

Most market participants agree that ‘distressed sale’ could scarcely be indicative of the real worth of a stock. National Clearing Company of Pakistan (NCCPL), which reports trading pattern of foreign investors on a daily basis, has started the good work of disseminating data of the off-market transactions by foreigners also from Nov 1. By virtue of those figures, foreign investors were net sellers. The first four days of the last week saw foreign funds dump shares worth $3.8m and at a substantial discount to the official closing price. The cumulative net sale by off-shore investors for the month rose to $8.1m.

A very pertinent question that would surface just as the ‘floor’ is removed from the KSE, would be to determine the ‘fair’ or ‘fundamental’ value of a stock, particularly that of a ‘blue chip’. The regulators are known to be looking into forming a team of top notch analysts, who would put their heads together to arrive at an independent assessment of ‘fair’ stock prices, based on ‘fundamentals’, while keeping the ‘fear factor’ aside.

But a debate rages on the rationality in allowing trading in ‘off-market’ when the ready market remains closed. Market participants hold varying views on the subject.

The old-time big stock broker, Haji Ghani Haji Usman, reputed for spearheading many movements, including the end of ‘badla’, vehemently opposes the operation of ‘off-market’.

He contends that the huge discount of 30 to 40 per cent seen in the ‘off-market’ spoils the already dismal investor sentiments. “The discount in the grey market gives a distorted view of stock prices and raises the level of panic,” he says.

“Small investors, who already seem to have lost eight out of 10 rupees from investment in equities, are likely to dump their remaining portfolio to salvage whatever they can,” says Mr Ghani.

And the broker suspects that some smart investors could be using the ‘off-market’ to make money. How? By purchasing shares at say 30 per cent discount, primarily from distressed local and foreign investors and selling them also in the ‘off-market’ at 25 per cent discount, making five per cent in profit in the process! At the peril of causing annoyance to stock broker, Haji Ghani, should one not appreciate the ingenuity of the money-minting mind?

Another batch of brokers and dealers does not see a sin in trading in ‘off-market’. A director who asked not to be named said that the issue had been raised in one of the board meetings, but it was brushed aside, after the apex regulator raised no objection in keeping the ‘off-market’ alive. The strong contention in favour of letting the ‘off-markets’ deal be, stem from the fact some investors could be in genuine need of money for other pressing needs.

“It is sad that such investors have what is said to be the ‘Hobson’s choice”, meaning to take what is offered or nothing,” says another broker, but he adds: “An investor understands that risk and rewards go hand in hand in the essentially unpredictable stock market anywhere in the world,” he says.