The stock trading industry in Pakistan is currently facing a gradual decline as a notable number of stockbrokers have applied to cancel their licenses at the Pakistan Stock Exchange (PSX) in recent weeks.

This decline can be attributed to various factors, including high-interest rates, political instability, economic uncertainty, government mismanagement, and an aggravated economic situation.

The disappointing performance of the stock market has left many stockbrokers disheartened and seeking alternatives.

Economic Slowdown and Losses

During the economic slowdown, stock prices experienced a significant drop, causing many stockbrokers to incur losses. As a result, regulators issued margin calls to stockbrokers when the market declined, which required them to provide additional cash to avoid defaulting on payments to their clients.

The frequent margin calls have pushed numerous brokers into losses, prompting them to relinquish their trading rights rather than default on their obligations to clients.

Impact of High-Interest Rates

The stock trading business in Pakistan is greatly influenced by the central bank's key policy rates. Currently, with the interest rate standing at a record high of 21%, investors feel more secure investing their savings in fixed deposits at banks rather than taking risks in the stock market.

The decline in market participation began when the interest rate exceeded 6%, discouraging potential investors from seeking risk-reward opportunities in the stock market.

The number of stockbrokers in Pakistan has been steadily declining, particularly since the demutualization of the PSX in 2017. From around 400-450 stockbrokers during that time, the number has reduced to 192 due to the increasing cost of doing business and challenging practices.

Stock brokering has become less viable as a result, leading to a significant decrease in the overall number of active stockbrokers in the industry.

Market Capitalization Decline

The market capitalization of the Pakistan Stock Exchange reached $100 billion during the previous government of PML-N in 2017. However, the market capitalization has now plummeted to $22.2 billion, indicating a substantial decline in the PSX over the past six years amid economic fluctuations.

The stock market has struggled to regain its peak levels since reaching a record high of close to 53,000 points in May 2017, primarily due to recurring economic crises.

Impact of Populist Budget

The recent presentation of a populist and unrealistic budget for 2024 in the national assembly has added to the selling pressure on the stock market. Commentators have labeled the budget as "neutral to negative" for the market, contributing to further decline and investor uncertainty.

The selling pressure reflects the lack of confidence in the market's ability to recover and thrive under the current economic circumstances.

Declining Trading Volumes

Trading volumes at the PSX have significantly declined, with an average of 100-120 million shares traded per day, compared to 400-450 million shares during more prosperous times. The decrease in trading volumes directly impacts traders' earnings, as they charge fees on each trade.

The decline in volumes can be attributed to a lack of investor confidence, economic uncertainties, and alternative investment options available to market participants.

Regulatory Directives and Increased Costs

Regulatory directives requiring stockbrokers to increase their capital have further increased the cost of doing business for them. The capital requirement has risen from Rs65 million to Rs70 million by July 1, 2023, and will further increase to Rs75 million by October 1, 2023.

Additionally, the multiple stages of KYC (know your client) requirements imposed on brokers have raised administrative costs. Simplifying the KYC process by accepting the KYC done for opening bank accounts could help reduce the administrative burden on stockbrokers.

The stock trading industry in Pakistan is currently grappling with numerous challenges, resulting in a gradual decline in the number of active stockbrokers. Factors such as economic slowdown, high-interest rates, declining market capitalization, populist budgetary measures, and increased regulatory requirements have contributed to this decline.

Rebuilding investor confidence, addressing economic uncertainties, and implementing supportive policies could help revive the stock trading industry and create a more conducive environment for growth.