Warren Buffer, American investor has denoted to derivative as “financial weapon of mass destruction”. Pakistan introduced equity derivative back in 2001. As credit derivative seek a down fall in 2007, which make equity derivative more attractive. But since introduction, derivative market performance of the equity market persists deprived. According to KSE managing director derivative market is fewer than 5% of the total trade volume. This is surprisingly very low as compared to our neighbor country India where derivative market constitutes of 70% of total trading volume. We fail to capitalize for last 13 year. We need to look how we can get potential benefit out of equity derivative. For this we need to look what kind of short comes we need to make it right.
In Pakistan single stock deliverable future remains the most popular instrument traded, with almost 100% volume attributed to this. Other instruments like cash settled futures and index futures are traded minimally, despite their myriad advantages. In Pakistan single stock deliverable future residues the utmost prevalent instrument traded, with nearly 100% volume accredited to this. Other instruments like cash settled futures and index futures are traded minimally, despite their myriad advantages. Further, most the investors in this market are single and small investors. Institutional participation is very passive, and only limited number of banks, NFBCs, and companies take part in this market.
After briefly over viewing this sector in Pakistan I tried to find lacking in our system. For this one of the prime reasons is lack of knowledge. Involvement of fewer financial institutes is another problem. Because according to SECP at least one party involved in transaction must be registered financial institute. The amount of technology, risk management, compliance and legal infrastructure required to run a successful equity derivatives business makes it relatively expensive. Liquidity of the market is another factor. Strict rule and regulation of SECP is also one the major problems.
We can flourish in this sector by doing few things. We need to produce specialist in this sector and inject this human resource into the market. We need to educate the investors about the potential benefit of derivative. Involvement of more institutes is also necessary to make this sector more liquid. We need to make the trading of this derivative less complex.