Introduction

Islamabad Stock Exchange owes its origin to the dynamic group of leading businessmen and professionals of Islamabad/Rawalpindi region who conceived the idea of the establishment of the third bourse in the country so as to provide new investment avenues to the people of the northern region of Pakistan.Islamabad Stock Exchange or ISE is one and youngest of the three stock exchanges of Pakistan and is located in the capital of Islamabad. It was incorporated as a guarantee limited Company on 25th October, 1989 in Islamabad Capital territory of Pakistan with the main object of setting up of a trading and settlement infrastructure, information system, skilled resources, accessibility and a fair and orderly market place that ranks with the best in the world. It was licensed as a stock exchange on 7 January 1992 so it started trading in July 1992 for the first time. The purpose for establishment of the stock exchange in Islamabad was to cater to the needs of less developed areas of the northern part of Pakistan.The ISE has set the highest standards of operational efficiency and is committed to support a climate of confidence and optimism that encourages and promotes trading activity. It also provides for conducive environment to channelize the small investments of the residents of less developed areas. The ISE offers an easy access to both domestic as well as foreign investors and actively encourages the listing of eligible and profitable companies, both large and small to make it an exciting and diverse Exchange. The Exchange is playing a pivotal role for economic growth of the area thereby contributing towards the overall economic prosperity and welfare of the country.

Regulatory structure of Islamabad stock exchange. 

The Islamabad Stock Exchange is a front-line regulator to control the trading activities that takes place at its trading platform. ISE works under the oversight of the Securities and Exchange Commission of Pakistan (SECP), which formulates rules for efficient and transparent trading of securities.

The corporate structure of ISE.

The affairs of ISE are run by a Board of Directors that is headed by a Chairman. The Board has a total number of ten directors including the Chairman and the Managing Director. Five directors of the board are elected from the members of the exchange whereas the four are nominated by the SECP. The Chairman of the Board is elected out of four non-member directors on the board. The Managing Director acts as the chief executive officer of the ISE who is appointed with the prior approval of the SECP and is the tenth director by virtue of his office.

Members of Islamabad Stock Exchange.

The trading of securities is done through members (brokers) of Islamabad Stock Exchange who buy ‘seats’ or memberships for conducting brokerage business at ISE after meeting the necessary membership criteria as devised by the ISE. The members of the ISE provide a link between investors and the stock market by buying and selling shares on behalf of the investors. The ISE continually monitors all the trading activities of its members to ensure that they are conducting the business within given legal framework. This in turn provides investors with a market they feel confident to use.ISE has 121 members out of which 45 are active members running their brokerage houses.

ISECTS:

Since the inception of automated trading system (ISECTS), the trade volume has been multiplying day by day and the average daily turnover has now crossed the figure of 1 million shares. Now all the listed securities are traded through the ISECTS. The system of physical handling of shares and securities has been phased out and majority of the scripts are settled through Central Depository Company of Pakistan Limited.

In comparison with major financial markets around the World, the functioning of capital market in Pakistan is still very much in its infancy and lacks advanced technology. In this context efforts are being made to bring ISE in line with the International system and methodology.

Trading System

ISECTS:

Initially an outcry method of trading (a method of trading that uses verbal bids and offers in the trading pits) in shares was adopted which was replaced with the automated trading system (a computerized system for matching orders in securities) commonly called “ISE-CTS” in 1997.

The computerized trading system has brought about much needed transparency in the securities trading. It has been designed in such a way to provide automatic matching of bids and offers for execution purpose. All orders are treated in strict price and time priority, thus ensuring a pure auction market where no order is overlooked or traded through. In this manner, the best trade is executed and passed on to the participants without human interference. Printed confirmation and status messages are immediately received by a member for each of his order.

UlTRA TRADE:

In the year 2002, ISECTS gave way to “ULTRA TRADE” trading system which is not only very efficient but also has extended trading capacity, internet trading functionality.

Ultra Trade: is stock trading software targeted for small to medium sized stock exchanges. It is a highly scaleable and cost effective solution for the emerging stock exchanges. State-of-the-art technology has been used for the best performance and very good response time to the end-user. Recent benchmark result shows that system is capable of at least 100,000 trades per hour.

System Architecture: Ultra Trade is highly parallel and distributed system by its design. Server components can be distributed on multiple machines and each component can take the full advantage of multiprocessor machines. Communication among all components is carried out using the high speed TCP communications that is world wide proven for real time stock trading.

Main components of the Ultra Trade are as follows:

Trading Engine receives orders from the trading terminals and processes them accordingly such as executing, changing, deleting and queuing.

Inquiry Server responds to different inquiries and reports from the trading terminal. Market Server holds best market and best price levels for all symbols and responds to trading terminals on request.

Statistics Server computes and holds different statistics for symbol and exchange and provides the trading terminal on request as well as on real-time basis.

Login Server performs user authentication and initialize the trading terminal.

Dumper dumps the orders and trades into the database in real time for settlement and dissemination system.

User Interface: The broker can enter Buy/Sell orders, cancel or change an existing order, cancel all outstanding orders globally in a particular symbol & also in all markets, and place a request to cancel a trade with Market Control. A comprehensive set of real time screens are provided to monitor the symbol and exchange statistics. Market Watch is an interface to monitor the market activity for selected symbols. Order Book shows the real time status of your orders in real time.

Remote Trading:

Remote Trading or Internet Trading has been implemented in ISE on 23 June 2003. Now Brokers can trade from anywhere in the world using remote trading software of ISE with the same robustness as working on the LAN.

Unified Trading System

Islamabad Stock Exchange joined hands with Lahore Stock Exchange on 30 April 2007 to establish a Unified Trading Platform to help in bringing increased liquidity in the market, improving price discovery, maximizing transparency, increasing turnover, broadening investor base, curtailing risks and distortions in trade, providing cost effective service to the investing public and enhancing the image of both the Exchanges.

They mutually started IT development program. As a result of which LSE extended their brilliant trading engine “Ultra Trade” to ISE on very comfortable business deal. This is a package deal in which LSE will be extending any development in their IT department to ISE.

Settlement System

When ISE was established T+7 settlement cycle was used for settlement of shares. T+3 was introduced in 2001 which has been replaced by T+2 settlement cycle in August 2007 to reduce the overall settlement risk in the market

Rules n regulationISE, being a self regulatory organization has its own sets of rules and regulations to regulate its various activities including listing of companies/ securities on its ready board quotation, supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on broker’s sales practices, and the continuous monitoring and surveillance of their trade operations.

Trading procedure on Stock Exchange

In order to purchase or sell securities on a stock exchange, the following steps have to be taken:

1. Selection of Broker:

A broker is a member of stock exchange and securities can only be purchased and sold through him. After selecting the broker the investor has to convince the broker to buy or sell securities on his behalf. For this purpose, the investor may have to make an advance or give references of a bank or some other persons.

2. Placing the order:

There are three parties involved in the dealing of shares:

The Stock Broker The Client

The Jobber

The stock broker simply acts as agent and contacts the particular jobber in the stock exchange on behalf of the client. He does not disclose to the jobber whether he is a buyer or seller of shares. He therefore, asks him to quote two prices:

I. The upper prices at which he is ready to sell the shares.II. The lower prices at which he is ready to buy the shares.

For Example, Mr. Ali wants to sell one thousand shares of a Company. He contacts a broker dealing on the stock exchange. The broker asks a jobber to give quotations. He does not disclose the jobber whether he wants buy or sell the shares of a company. The jobber gives two prices, one at which he is willing to sell and the other at which he is ready to buy. For instance, the two quoted prices are Rs.21.90 and Rs.22.00 in a thousand. This means broker is willing to purchase at Rs.21.90 and sell at Rs.22.00 per share. If the broker is not satisfied, he can go to another jobber or ask the first one to make it closer (i.e. to reduce the margin between buying and selling). If the broker is satisfied with the new quotation, he then contacts with his client informs him the bid of the share. If the client agrees to the bid price, then bargain is struck

3. Preparing the contract note:

The stock broker prepares a contact note, one copy of which is given to the client; second one to the jobber and the third remains with the broker. The contact note generally contains the following information:

Name and the address of the stockbroker. The name and address of the jobber.

The type and price of the share.

The commission of the broker.

The date of transaction

4. Settlement:

In case of ready delivery contract, the buyer pays the money and the seller delivers the securities one same day.

In the case of forward delivery contracts settlements are done in a week or once in a month.

On the settlement day, the difference in the purchase and the sell price may be paid without any delivery of securities. The parties may also postpone the deal to the next settlement date through mutual consent. This is known as “carryover” or “budla”.