PSX mulls new counter for trading of less liquid stocks

KARACHI: Pakistan Stock Exchange (PSX) is mulling a separate counter for trading of less liquid stocks in a bid to ramp up free-float in the bourse and curb price manipulation, a document revealed.

An equity stock will be classified as less liquid stock if it is below any of the thresholds relating to free-float, number of days traded and average daily traded value and volume as prescribed by the exchange.

The unique identification numbers also solicited public comments on the draft of
provisions related to the counter. A company’s stock becomes less liquid, or illiquid, when limited availability of tradable shares makes it difficult for public to buy or sell it on the exchange. 

Analysts said the move is an attempt to increase share float in the stock market as a higher float on the Pakistan Stock Exchange will lead to increased trading, better price discovery and reduced chances of manipulation.

Analyst Ahsan Mehanti at Arif Habib Corp said investors will be able to trade more in less liquid shares, which would result in increased overall volume and there will be increased exposure and better price discovery.

Under the proposal, a less liquid stock will be excluded from the list if it qualifies conditions relating to profitability, dividend payout and market capitalisation. The document said only eligible unique identification numbers (UIN) specified under the regulations of National Clearing Company of Pakistan Limited will be allowed to trade in less liquid stocks.

An ineligible unique identification numbers, however, will be permitted to sell the less liquid stocks. The trading in less liquid stocks is proposed to be conducted in periodic call auction sessions, while the exchange will review listed equity stocks every quarter based on data available for last three months to determine the list of stocks at the start of each quarter, which would be traded at less liquid counter for the next quarter in the ready delivery contract market.

Under the proposal, the closing price of a stock traded in less liquid stock counter will be determined on the basis of volume weighted average price during the last call auction session. Due to illiquid nature of these stocks, their impact cost and price volatility is usually higher, it said.

Therefore, circuit breaker of 20 percent or Rs5, whichever is higher, is proposed to be applicable from the closing price of the previous day. “Since the circuit breakers are proposed to be fixed at 20 percent it seems the management is aligning the market mechanism with the rest of the world where there are no circuit breakers,” Mehanti said.