Pakistan’s history is full of instances when powerful lobby manipulated stock market for their personal gains.
In April 2019 once again rules were manipulated in such a manner that yet again small investors were duped to deprive and incurred heavy losses. This time, this should not go un-noticed and these manipulators, rather culprits, should be taken to task.
This will be the right time to hit the nail right on its head before the same is put to rest under the carpet after the blame game.
On April 30, 2019 Acting Chief Regulatory Officer (ACRO) issued a Notice to all TREC holders elucidating Rule 13.5.2 of PSX Regulations relating to execution of sale/blank sale in Deliverable Futures Contract (DFC) Market. The above notice also stated that strict action will be taken in case of observant of any non-compliance.
Rule 13.5. BLANK SALE AND COMPLIANCE of PSX Regulations
- 13.5.1. A Broker on its proprietary or clients’ accounts on UIN basis shall be allowed to make Blank Sale up to 0.5% of the Free Float of a scrip or Rs.50 million, whichever is higher, in the Deliverable Futures Contract Market subject to maximum blank sale of 3.0% of the Free-Float of a scrip by such Broker for all its accounts including proprietary and clients’ accounts at any given time during a Contract Period.
- 13.5.2. The Broker on its proprietary account or client’s account in Deliverable Futures Contract Market shall execute:
(a) Sale through normal sale order window in the system if the broker or the client, as the case may be, either owns the securities or has a Pre-Existing Interest;
(b) Blank Sale within the threshold permitted under sub-clause 13.5.1 above through special order window designed in the Trading System for Blank Sale.
Provided where the Broker executes Sale through the special order window as mentioned in sub-clause (b) of this clause or executes Blank Sale through the sale order window as mentioned in sub-clause (a) of this clause due to inadvertent mistake, such Broker shall be required to modify such sale through the interface provided in the Trading System for this purpose during the sale modification session. Such modification session shall be subject to a fee as per the Deposit, Fee, Contribution and Other Sums Schedule.
Provided further that in case the Broker fails to modify such sale during the sale modification session, the Exchange shall take disciplinary actions as provided in Regulation 20.9.
13.5.3. Pre-Existing Interest in order to remain qualified for this purpose should continue to exist until the sale position in the Deliverable Futures Contract Market is squared off or settled at the expiry of the Deliverable Futures Contract.
Bold and underline added for emphasis.
Important dates – Rule 13.5
- Introduced in 2002 under Regulations for short selling under regular market, 2002;
- Rule book of KSE approved by SECP on April 10, 2014 Gazette notified on June 18, 2014;
- Pursuant to integration of stock exchanges effective January 11, 2016 Rule book KSE renamed as PSX Regulations;
- Amended in Rule 13.5 on September 21, 2017;
- PSX Notice 5001 dated August 31, 2018 on the subject Modification interface for Deliverable Futures Contract Market (DFCM) to rectify sales erroneously executed through sale order window (F5) or (F8); and
- PSX Notice N-539 dated April 30, 2019.
Change in interpretation of the Rule 13.5.2
One can observe that a rule introduced in year 2002 and after amendments till April, 2019 (i.e. after 17 years) was suddenly interpreted differently and its new interpretation and methodology was changed overnight on April 30, 2019. There is no doubt that we all learn over a period of time but sudden changes during the currency of Deliverable Futures Contract for May 2019 is a matter of grave concern.
It is an internationally accepted unwritten rule that we cannot and should not be allowed to change rules during the pendency of contract. Number of reported Court cases can be checked on the topic of Rules of the game cannot be changed midway.
Rules changed or rather new interpretation of existing rules, of blank and short sale emphasised. As a result hedgers, providing volumes and price discovery, were barred from swapping/hedging positions between regular and future markets
This is actually what happened. On April 29, 2019 KSE 100 index closed at 37,026 with average volume for April 2019 around 200+m. Hedgers were barred on April 30, 2019 not only during market hours but also between the May Contract of DFCM. Following table will clearly depicts the impact of change in rules during the pendency of a contract.
|Date||Volume In Million||KSE 100 index|
KSE 100 index lost 3,126 translated in 8.44 % in just 09 working days from April 30 to May 13 and will further deteriorated with the passage of time as we move close to last days of Deliverable Futures Contract for the month of May, 2019. When investors’ who bought shares under DFCM for May’19 will not be able to find hedgers and will be forced to square their positions to avoid deliveries. End of DFCM May 2019 appears to bring catastrophe in PSX.
What was newly interpreted in the Rule 13.5.2 is basically the term pre-existing interest. Initially, from year 2002 to April 29, 2019. This pre-existing interest was never considered as pre-existing when hedgers used to buy back using F4 key from Regular market. On April 30, 2019 it was evolved as pre-existing interest, hence from April 30, 2019 any purchases using F4 key in Regular market will be considered as pre-existing interest for any sale through F8 key in DFC market. Previously, PSX used to net-off sale in F8 in DFC market with that of purchases in Regular market. This set-off, after the change in interpretation of pre-existing interest will not be admissible any more.
This created panic as hedgers were using computer systems to execute both sale/purchase transactions on real time basis. It is humanely impossible to execute such transactions due to spread, timing and quantity.
The penalties indicated were too high to execute further business. The above chart reflects aftermath of new interpretation. Volumes dried, KSE 100 index nosedived.
Interpretation changed overnight to benefit whom
Apprehensions are that shrewd players holding long positions kept their witty-eyes on the daily open position in Deliverable Futures Contract Market displayed by PSX on it’s website, both script-wise and broker-wise. Shrewd players were watching and computing over last few months the quantities displayed on PSX website to get hold of short sellers. The numbers displayed under open interest in DFCM often crossed the free-float of the concerned script. They were stranded, when even after few months no one showed interest to cover what shrewd players thought as short sale. Panic button pressed as long position kitty was full and stock market did not show any sign of recovery.
But, when luck is not on your side, nothing can benefit. After inquiry, it was revealed that:
- Data reflected on PSX website is based on gross rather than net sale;
- Clean chits were given by PSX management to hedgers from time to time;
- Providing trading system is the prime responsibility of PSX;
- Amendments in Rule 13.5 was made in September 2017 whereas modification interface developed after one year by PSX;
- Even after development of modification interface in September 2018, No one at PSX bothered to implement Rule 13.5.2 which clearly reflects overnight change in interpretation;
- Almost all stock brokers are in hedging business and practice over the years will prevail rather than change in interpretation of rules;
- Strict action will be taken in case of observant of any non-compliance, though communicated vide PSX notice 539 dated April 30, 2019, but could not be imposed due to reasons mentioned above.
This adventure, incurred heavy losses not only to small investors but to the Country as well. Someone should be taken to task as to why Rules were interpreted and changed during the match that is during the Deliverable Future Contract for May 2019.