When will day traders come back?

31 Oct, 2008

In the early part of 2005, the stock exchange had witnessed a devastating crisis resulting from an effort by the then SECP Chairman to introduce the mode of bank financing in place of Badla Financing. In fact, Badla financing had remained historically a source of extra liquidity for speculative buying and selling in the stock market.
This mode of financing, along with short and blank sale of facility in the market activates Day Traders as also short-term speculative traders/investors who together create major part of activity and price movement and thus make the stock market function dynamically. In fact they are real life-line for active functioning of the stock market.
In 2005 what happened was that Badla facility was stopped completely in spite of the fact that bank financing could not be arranged. The mode of bank financing was in fact unviable for the brokers/investors as it required 30% margin to the banks and another 30% margin to the stock exchange which meant 60% blockade of funds/shares. The result was that last block of 7 blue chip scrips under Badla system finding no exit put the entire market in a devastating crisis.
The price of OGDC which had reached the peak of Rs 196 per share due to foreign buying was the most affected one. The market was ultimately bailed out by certain brokers and institutions who bought the entire quantity offered at Rs 118 per share. The new chairman of SECP very wisely reintroduced the same old Badla system with a new title of Continuous Financing System (CFS), of course with a certain quantitative limit which later kept changing as per the requirements of the market.
This scheme worked very well for the last 3 years as can be seen from the movement of the stock exchange index from 7450 in June 2005 to 15600 in June 2008. The credit of this successful operation of the stock market goes to the fact that all the necessary ingredients of the efficient operation such as CFS and short and blank sale options remained in place throughout this 3 years period.
Even at this high level of index the Pakistani stock market was considered as most attractive among all other Asian markets by the foreign rating agencies on the basis of the lowest price-earning ratio of around 12.5% as compared to other Asian Markets working at 15% as compared to other Asian Markets working at 15% or even at higher ratios.
If the political situation in the country had not deteriorated, the market was expected to attain the level of 17000 to 18000 in a matter of one year while still being at an acceptable level of price-earning ratio. The recent stock exchange crisis is basically the result of precarious political and economic upheaval in the country.
However, failure of the first bailout package of Rs 20 billion for revival of the market launched towards the end of July 2008 needs more serious analysis of the situation. As already mentioned earlier the day traders and shot-term trader investors play a pivotal role in generating volume and keeping in price discovery both of which are essential for normal functioning of the stock market.
The bailout package of Rs 20 billion could not bring the day traders and short-term trader investors in the market due to restructure provisions on short and blank sales introduced right in the mid of already existing crisis. As media reports show a number of brokers have already reached the default stage even at the present frozen level of prices.
Any further fall in prices may result in many others joining the default list which some of them creating a new list of bankrupt members. Since most of the brokers meet their liquidity requirements through banks, they too will have to bear this brunt of default and bankruptcy of the brokers.
If it happens, the banks will fall more deeply into liquidity crisis which they are already facing due to defaulting industrial and commercial sector as also different government organisations and public sector entities having accounts with the banks.
The much talked about locally arranged bail out package of Rs 20 billion for 7 public sector scrips and Rs 30 billion foreign fund with sovereign guarantee of the government will definitely ease out the situation, but it is yet to be seen as to how far these funds will be able to bring the day traders and short-term trader investors back into the market while the short and blank sale provisions still continue to maintain their present limitations. Let us hope that the small investors who generally depend on day trading and short term trading are not completely wiped out of the market.

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