[abdul]

There are reports appearing in the press alleging corruption in the research units of brokerage houses managing their proprietary trading portfolio in the stock market. The revelations are petrifying to say the least. The accusation is that research analysts are sometimes influenced into changing the contents of their research reports to benefit the positions taken by their employers.

Not only that, these reports also indicate the growing presence of the biggest menace in stock market, the insider trading, which is rampant in Pakistan and mostly benefits the big fish, including the broker-members as well as their large institutional clients.

A slight twist here and another there, and the research report announces that such and such share is undervalued because his employers are long in that share, or such and such share is overvalued because the employers are short in that share.

Many institutional and individual investors read these reports and base their buy and sell decisions on the basis of analysts’ recommendations. A leading brokerage house is notorious for doing all this, but SECP somehow seems either unaware or unwilling to tackle this subject.

The institution of research was already very weak in Pakistan, with only a few of the many brokerage houses managing a research unit staffed by suitably qualified analysts, and this new allegation of some analysts forced to "front" for their employers is surely going to worsen the matters. Most unfortunate is the fact that there is hardly any independent research outfit to provide independent investment advice in Pakistan.

Because of lack of SECP regulations and their implementations, people working in the finance departments of some major listed companies trade their own companies’ shares, and also pass on the information to some unscrupulous broker/members of stock exchanges. The information is also shared with the most prized institutional investors so that their commission income stays on the books.

These two malpractices are the bane of stock markets in Pakistan and SECP should be able to bring on line some regulations for strict enforcement. For one thing, they should develop in-house monitoring of analysts’ reports and employ a good number of well-paid analysts to conduct a secondary research on the financial models employed by analysts. There should be well-defined standards for each research analyst to follow, and rating agencies could come in handy to give a comment on quality of research.

As for insider trading, SECP’s task is very difficult indeed. To be able to do anything, SECP would need to know about all official and other "benami" trading accounts of each and every broker-member. Although challenging, this is not an impossible task and sooner it is done the better.

Secondly, the use of public mutual funds should be promoted for all institutional investors, especially the financial institutions, so that they can share any and all benefits of insider trading with the public. Finally, all mutual funds should also be rated by the rating agencies.