Changes at the Pakistan Stock Exchange (PSX) aren’t exactly the most exciting events in the world, especially with all the other things going on in the country. And a change in the system used for trading at the PSX would not merit much discussion, but leave it to the good folks over at the stock exchange to keep us hooked with even the smallest changes they make.
Since 1977, the PSX has been using the Karachi Automated Trading System (KATS) to execute trades at the stock exchange. Recently, it was decided that the system would be replaced by a new, more sophisticated system from China. Within days, the new system had wreaked havoc in the shares market because of technical issues, causing trading to be suspended for hours as employees of the stock exchange scrambled to figure out what had happened.
What is the new system?
On October 25, 2021 the PSX moved from the KATS system to New Trading Engine (NTS) which they have procured from the Shenzhen Stock Exchange (SZSE), China. For some reference, the SZSE is the world’s third largest exchange which also happens to own a 40% stake in the PSX.
The PSX had signed a contract in November 2019 with the SZSE worth $5 million to acquire the trading and surveillance system in order to improve the operational and technological performance of the exchange. The system was to be introduced in March earlier this year, however, due to stakeholder concerns and requirements that were to be addressed the exchange decided to launch it in October 2021.As per the latest annual report by the PSX, the system has a safe operation record of 17 years without any trading interlude.
What’s happened since the new system came into place?
On October 27 2021, trading was suspended for two and a half hours in the middle of a session due to technical glitches in the newly acquired Chinese trading system that had been in use for three days already. Trading stopped between 12 noon to 2:30 pm and resumed at 2:35 pm.
However, towards the end of the trading session, the system went down again from 3:30 to 4 pm. It was decided that if the system malfunctioned again, the PSX would temporarily return to the old system, KATS, until glitches were addressed.
As per the PSX management, the first halt was “to conduct a detailed review of the issues and protect the interest of the investors”. The suspension was extended later so that the PSX could “review” the issues. According to a report by Dawn, the PSX held 18 mock sessions before formally adopting the platform. But the association of stockbrokers claimed a day ago that none of the mock sessions was error-free.
The PSX acquired the new system from the Shenzhen Stock Exchange (SZSE), a related party, for Rs461.26 million, according to its latest annual report.
Thin volumes
Technical glitches aside, following the change, the volumes at the PSX have been thin. As per a letter by the PSBA General Secretary, Bilal Farooq Zardi, “Volumes have shrunk dramatically due to hasty decisions based on the impractical system causing revenue loss not only to the Exchange, our members but also to the public at large. We fail to understand the logic behind its abrupt implementation during the rollover week.”
It must be kept in mind that the system itself is not used by people that go to the stock exchange to make trades, but by their brokers. As Profit has detailed in an earlier explainer, while some high-end brokers also offer advice, the core role of a stock broker is to buy and sell stocks for a client. This buying and selling takes place completely over a computer system. For the past three decades, the KATS system was being used by brokers and the change in systems has been an implementation they have not been particularly happy about.
Stockbrokers are not too keen about the new system despite 18 mock sessions being held before formally introducing the new system. “Prior to the deployment, eighteen (18) mock trading sessions were held for all brokers. All the concerns, enhancements and issues highlighted by the Broker Committee were looked into by PSX and SECP, and as per agreement, most were catered to prior to live deployment, while some were mutually agreed to be delivered post go-live,” said the PSX.
However Zardi says that “in this process, 18 mock sessions were conducted and errors, flaws & imperfections could not be addressed/removed in their entirety. This has compelled us to state that the Exchange is being damaged by unprofessional decision making.”
As per a notice by the PSX on October 28, “At the outset, it is important to note that the SZSE NTS is working exactly as per specifications. The processing speed of the system held true in the live environment. Trading activity continued and over 580 million shares traded in the market today.”
Is the SZSE system to be blamed and are the glitches going to be long term?
One would think a system procured from the world’s third best exchange would not be faulty. Truth be told, it isn’t. The issues brokers are primarily facing are more related to the Jade Trading Terminal (JTT), developed by a local vendor for the PSX. The JTT was designed and developed as per the demands of brokers.
The PSX said, “In most markets, the front-end trading terminals are developed by brokers themselves as per their requirements. At present, the material issues being faced by brokers in JTT include slow feed, delays in updation of trade and disconnection.”
As per whether the issues will persist, the PSX says that the issues are almost resolved. “Currently, PSX IT teams are working constantly on addressing the concerns and issues in JTT that connect to the NTS. RMGS issue was resolved on Monday. The slow feed issue has been mostly resolved and the changes implemented before market open on Thursday. We expect the disconnection issue to be resolved on Friday. The vendor and PSX team are working on the resolution of delays in updation of trade logs and expect to implement some changes on Friday and the rest before market open on next Monday.”
What do stockbrokers have to say?
Brokers have claimed that the NTS lacks basic features and has frequent glitches. As a result, they say it has caused trade execution delays.
On October 26, the Chairman Pakistan Stock Brokers Association (PSBA), Aamir Khan, wrote a letter to the SECP stating, “members are facing difficulties in consummating transactions in the recently introduced New Trading System (NTS) by the PSX on October 25, 2021″.
However, as per the PSX, “The decision to go live on October 25th was taken by PSX after consultation and with mutual agreement of the Pakistan Stock Brokers Association, the Broker coordination committee, other leading brokerage houses and SECP.”
While speaking to Profit, a leading stockbroker while requesting to remain anonymous said, “We’re doing our best to negotiate with the PSX about this change. The new system is just not acceptable. The mock trials themselves weren’t free of error. Why are we trying to fix something that is not broken? We want KATS back and that is a firm stance. Besides, this system relays law data to the SZSE in real time. This makes the PSX vulnerable to attacks.”
The fact that not many are happy with the new system can be noted through the fact that five days before the formal launch of the new system, 57 stockbrokers wrote to the PSX expressing their concerns. “We regret to put this on record that this system is not fully ready at this stage to go live. Responsibility for any damages is on the exchange, and not on the market participants, especially when you have already been apprised pertaining to the risk associated with this incomplete system”
Why do brokers even care?
A broker claims that the thin volumes are no coincidence. “The fact that the brokers are out in public against the system is just the tip of the iceberg. Brokers in Karachi have colluded. They’re trying to use their collective power and of course their influence to go back to the old system. If the PSX has paid millions of dollars for a system used by the world’s third largest exchange, it’s unlikely that it’s not good enough for the PSX.”
The new system overcomes the lack of surveillance in the previous one which can help overcome manipulation of shares. This also may be a reason why brokers aren’t too keen on a change of “software”.
What is the actual problem?
The actual problem is a lack of technical expertise with deployment. While we hear news of apps like Facebook being down, it is an anomaly for a securities exchange to shut down in the middle of the day due to a fault. It is unknown whether this is due to the bullying or influence of certain brokers. However, what one does see is the lack of proactive measures or repercussions put in place by the SECP. The fact that the only exchange in the country can be shut for a few hours during trading sessions because of some glitches or pressure groups is not a healthy sign.
