Implementation of Proposed Margin Trading System in Pakistani Stock Markets: an Exploratory Study

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IMPLEMENTATION OF PROPOSED MARGIN TRADING SYSTEM IN PAKISTANI STOCK MARKETS: AN EXPLORATORY STUDY

Col. Zaigham Khan
Scholar MS- Management
Riphah International University, Islamabad, Pakistan
Hammad Sultan
Scholar MS- Management
Riphah International University, Islamabad, Pakistan
Farrukh Saleem
Scholar MS- Management
Riphah International University, Islamabad, Pakistan

ABSTRACT

Due to adverse law and order situation, Pakistani Stock Exchanges have been turbulent which resulted in depletion of domestic and foreign investments. Introduction of various liquidity products, like; Carryover Trade and Continuous Funding System, failed to develop business friendly environment and diminished in the process. Currently due to the absence of any liquidity product the investors feel deprived of the margin and flexibility to invest freely. To address the issue, there have been a serious quest by the relevant authorities to implement another leverage product namely, Marginal Trading System (MTS) in Pakistan, however, despite being at advanced stages, due to the apprehensions regarding lack of transparency, this system could not be implemented and the market continues to suffer. In such situation a need was felt to carry out an exploratory research to suggest measures to reinstate investor’s confidence. The objectives set forth for the study were to elucidate existing impediments in implementation of MTS, suggest methods to bridge the gap between decision makers and the stakeholders and to recommend way out for the implementation of MTS after satisfying all existing apprehensions of the decision makers. The scarcity of the literature on the subject led us to an impasse on the very outset. However, we had to hinge on some partially relevant references to liquidity, margin requirements and volatility. An exploratory study by outreaching all stakeholders was conducted involving extensive interaction with government authorities, decision makers, investors, brokers and financial institutions all over Pakistan. A grueling exercise, initially gaining little headways, reminded us of the apt advice of our instructor “as a beginner one should not attempt research on something with no literature at all” also that meaningful grin on his face, while allowing us to go ahead, with the subject chosen, on our insistence. Notwithstanding all complications, the sense of determination prevailed, where the humble efforts continued and study reached a level where it could find a reasonable solution to the problem. The paper presents conclusive recommendations for an immediate implementation of the proposed MTS with adequately equipped infrastructure and control measures to ensure check on volatility. As a regulatory tool, linking of Margin Requirement with MTS has also been proposed. A need for major reforms like formulation of compatible regulations through a process of legislation and launching of nationwide awareness campaign for the investors has also been suggested in the paper. These proposed reforms, if implemented in true letter and spirit by the authorities, can recover the ever deteriorating investment climate in Pakistan.

INTRODUCTION
Stock markets act as backbone of a country’s economy as they play a vital role in the capital mobilization and provide secondary markets to the investors and financial institutions to buy and sell the securities. A stock market is to be considered as liquid when large transactions are executed with a small impact on prices of securities. Along with other factors, the stock market liquidity is considered a best tool to measure the efficiency of a stock market. Karachi Stock Exchange (KSE) is one of the oldest security markets of the Pakistan which has been inconsistent due to worsening security situation, growing fiscal deficit, energy sector’s circular debt and decrease in foreign investment. Over a period of time the uncertainty in the market has discouraged the...
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