Why stockbrokers are going out of business

KARACHI: Stockbrokers are going out of business in growing numbers as the brokerage industry faces consolidation amid an increasingly stern regulatory regime.

As many as three brokers — formally known as Trading Right Entitlement Certificate (TREC) holders — either requested to surrender or successfully surrendered their trading rights on Tuesday, according to the Pakistan Stock Exchange (PSX).

These brokerages are SMB Securities Ltd, SAAO Capital Ltd and RAH Securities Ltd.

Speaking to Dawn, Topline Securities CEO Mohammed Sohail said an increasing number of small and medium-sized brokerages are finding it hard to survive the unrelenting downswing in the stock market, which has reduced the trading volumes down to one-third of their “normal” level.

The average daily volume traded in the ready market during the first nine months of 2022-23 decreased 30.9 per cent to 221 million shares.

“In addition, an ever-rising number of regulatory requirements meant to comply with know-your-customer (KYC) and anti-money laundering regulations have made the business environment too tough to navigate for players with limited resources,” he said.

According to data obtained from the Central Depository Company (CDC), the number of brokers at the end of May 2023 was 218. At the beginning of 2022-23, however, the same number stood at 279, according to the annual accounts of the PSX.

Mr Sohail said the top 30 brokers handle up to 60pc of the total brokerage business in Pakistan. The number of brokerages that produce original research and analysis for their clients is less than 15, he added.

Many of the firms surrendering their trading rights in recent months mainly survived on proprietary trading, which refers to brokerages investing for direct market gains instead of earning commission income for trading shares on behalf of their clients.

As per a back-of-the-envelope count by a senior official of a quasi-regulatory body, the number of compliance reports — relating to KYC, due diligence, client monitoring, suspicious transactions etc — that every full-scale brokerage must submit to different authorities in a given year is north of 130. This figure has gone up significantly in the last decade or so, resulting in a steep rise in compliance costs for brokerages.

Speaking to Dawn, Stockbrokers Association Chief Executive Bilal Farooq Zardi said the rising cost of doing business amid low trading volumes and record-high interest rates has compelled smaller players to shut operations permanently.

“Brokers operate on a commission basis while the regulatory bodies charge them a host of fees under numerous and ever-increasing heads. Most brokers can’t pass these added costs onto their clients,” he said.