One of South Asia’s up and coming economies, Pakistan, has witnessed exponential growth in commodity derivatives volume on the country’s main futures and commodity trading bourse, the Pakistan Mercantile Exchange (PMEX).
The cross asset exchange which offers a range of instruments including; gold and oil posted notional trading volumes for the month of November. The exchange saw volumes exceed the formidable PKR 200 billion mark ( USD$2 billion) .
In November the total volume executed on PMEX was PKR 207.2 billion, surpassing the previous record witnessed in September 2012, where the exchange traded PKR152.4 billion.
Ejaz Ali Shah, Managing Director of PMEX spoke about the record volumes in a statement to the media saying: “This increased volume is a testament to the growth potential of the exchange. It also indicates that an increasing number of Pakistani investors are accepting commodities as an alternative asset class for portfolio diversification. Having said that, I feel that it is just a beginning and we would witness many such records with regards to volumes and participation in coming times.”
The exchange has seen volumes grow year-on-year, data supplied by the exchange shows that in fiscal 2013 the exchange executed 4.3 million contracts, a 19.4% increase from figures reported a year earlier.
“Gold holds status through cultural and traditional means, with the gold market becoming more mainstream investors are more welcoming to trading in the futures market,” explained Naveed Siddiqui, Co-CEO of Mathamax Markets, a research consultancy to Forex Magnates.
Commodity investment could outpace the country’s primary equity market as conditions are more attractive for investors; the global volatility in commodities is another attractive element. The majority of volume on PMEX derives from retail investors, former Acting Managing Director PMEX, Amjad Khan spoke about the interest among individuals in a comment to the media in August 2013, he said: “Approximately 200 new clients are added every month.”
Data from the exchange shows that there are around 8,000 trading accounts, with nearly 25% actively trading on a monthly basis. Compared to the stock market, the KSE only has 55,000 private investor accounts, according to data filed by the exchange.
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Masroor Ghori, an introducing broker in international financial instruments believes there is scope for growth if PMEX can maintain liquidity and international standards, he said: “The global FX and CFD markets offer high-tech platforms, low margin and 24 hour trading, it’s now very easy to set up algorithmic trading to trade 24 hours. If we want to develop our financial trading environment in Pakistan then we need to provide the latest solutions that people are used to when trading the DAX or S&P on MT4.”
Leading platform provider, MetaQuotes, partnered with a financial educational institute, Nazish Lutfi in a bid to promote the platform in the domestic market. “We are in initial talks with the largest brokers and exchanges, MT5 is a multi-asset platform and can serve the needs of both stock and commodity brokers.”
As of yet no broker has gone live with MT5 however, a person close to the brokerage said that the deal is on the table, “a 2014 launch is imminent.”
Pakistan is a historic player in margin products from as early as the 1980’s, and has been slow to establish a developed domestic market for derivatives trading. The launch of the country’s first commodity exchange post millennium signalled the advancements in Pakistan’s financial markets arena.
Trading volumes have soared in line with volumetric data issued by the world’s largest exchanges such; as CME and ICE. PMEX provides Pakistani users a range of instruments denominated in Pakistani rupee, hence removing the additional currency risk when trading on international exchanges.
The exchange has been a pioneer in implementing sound techniques to provide efficiency in Pakistan’s e-trading market, according to its corporate website: “(PMEX deploys) risk management techniques based on Value-at-Risk with a pre-trade risk check in real-time. The Exchange acts as a central counterparty to both buyers and sellers through a novation process and provide clearing & settlement on a T+0 basis using on-line bank transfer mechanism.”
Established in 2002 as the National Commodity Exchange Limited, it later changed its name to PMEX in 2011 in line with the firm’s strategy to be a full-service trading venue for a wide range of commodities. PMEX’s shareholders include the Karachi Stock Exchange, National Bank of Pakistan, Pak Kuwait Investment Co, Zarai Taraqiati Bank and the other two national stock exchanges.
The south Asian country is one of the largest producers of cotton. Gold has cultural importance and the country produces several other soft commodities, without adequate tools for firms to hedge and manage risk, a dedicated venue was paramount to maintain price discovery and stability.
Margin FX is a popular alternative investment product although the regulators do not classify it as a regulated asset class. Due to the tough regulatory environment onshore, several Pakistani brokers operate from Dubai. Recently two people of Pakistani origin were involved in discrepancies in their respective FX brokerages. GTL Trade and MMA Forex.