AI

The Technology Evolution of the Stock Exchange

The Stock Exchange is as essential as a Central Bank to a country. The health of a stock exchange can compliment the health of a national economy as well as the state of politics and the general society. Take for example the fact that the Karachi Stock Exchange. It was listed as the best performing market in the world in 2014, reflecting stability and prosperity, and fell to the bottom of the same list in 2017, reflecting the political turmoil brought on by the ouster of Prime Minister Nawaz Sharif. Major companies are generally listed on exchanges and allow public trading of stocks after an IPO; a rite of passage for any company looking to make it big in the world.

The concept of a stock exchange, however, did not originate until the Renaissance. According to historical accounts, trading of securities and bonds began in Venice during the 1300s. This was in part to pay for wars and conflicts and in part to exchange debt between moneylenders. The Dutch East India Company also had investors which assumed responsibility for it in the proportion of the total investment they had given (an early LLC of sorts).

The first modern stock exchange was the London Stock Exchange, established in 1698. It set the precedent for buying and selling stocks. The exchange would list the prices of certain commodities such as salt, coal and paper listed every few weeks and securities were traded for as long as the length of a tallow candle would burn, setting the precedent of the opening and closing bells. Through the roughly three hundred year history of stock exchanges, they have evolved from being literal markets where bidders bought physical stock certificates in person to trading on phones through stockbrokers to today, when the internet has digitized the entire process. Modern stock exchanges operate on strict timings and handle trillions of dollars in stocks.

Listings in Pakistan
Pakistan has three stock exchanges; one in Karachi (established 18 September 1947), Lahore (established October 1970) and Islamabad (established 25 October 1989). All three were merged into the Pakistan Stock Exchange (PSX) on 11 January 2016. A future stock exchange is also planned in Peshawar.

Trading in the 1970s and 80s in Pakistan was similar to the global standard; investors called stockbrokers to buy and sell their shares. This began to change in the 1990s with the advent of the internet. Initially, data services entered the scene, providing real-time information on stock prices and fluctuating markets to individual investors. During the mid-1990s, secure leased lines were installed at the Stock Exchange to allow digital stock trading during the last hour of operation. This all came to a head in 1997, when the Stock Exchange went through a digital overhaul. Each stock broker’s office was connected to the Exchange through an optical fiber network and trading was made entirely digital. This was done in conjunction with EFA, a Canadian software vendor.

Today the process of trading is completely digital, with even some banks such as Summit Bank and JS Bank offering stock trading online. However, some major overhauls are yet to come. Due to the proliferation of artificial intelligence and various forms of fintech, participation in the stock market, as well as its behavior, will inevitably go through massive shifts in the near future.

Mahmood Siddique was appointed the Chief Information Officer (CIO) of the Pakistan Stock Exchange in October 2017. He has previously been the Head of IT for the State Bank of Pakistan and Barclays Pakistan and the CIO of the National Bank of Pakistan. He brings his 13 years of experience from the IT positions in various banks to his current post, hence his belief in the transformative power of IT in finance. He is part of a new line of executives assuming the reigns of the organization since the Chinese consortium bought 40% of its shares. “The Exchange is on the way to becoming a multinational organization,” explains Mahmood.

His rationale? The exponential growth of the stock exchange as the 21st century has progressed, citing that the KSE-100 index recently peaked at 53,000 points. “The proliferation of internet access in Pakistan for the continuously rising volumes of shares bought and sold in the country. So much has helped, but there is still a lot more to do.” Pakistan currently has nearly 250,000 investors on PSX, a number which extremely low and stagnant. In comparison, China has over 200 million investors listed on its exchanges. Even if one compares a country with a similar population size such as Bangladesh, which has 4-5 million investors, Pakistan Stock Exchange appears significantly smaller in terms of total investors.

Mahmood reflects, “This is the result of low investor confidence due to political turmoil within the country as well as the result of unfriendly government policies which sour investors. However, the privatization of the Exchange, new management has set immediate goals for its growth. Within 3 years, PSX aims to have over 1 million investors; three years after that the organization plans to have over 2.5 million; a tenfold growth planned within 6 years.”

Additionally, PSX has reached out to several universities to get students interested in the stock market. The events involve giving students a basic knowledge of the stock exchange and training on how to buy and sell stocks. “We provide students with a pseudo-trading application with a starting kitty of PKR 1 Million. They are allowed to trade for a week, at the end of which, the student with the highest amount wins the competition.”

The Disruption Standards
When it comes to fintech, Siddique is appreciative of cashless payments and mobile wallets, but skeptical; almost dismissive; of cryptocurrency. Cashless payments are already making waves throughout the world. China is famous for its QR code based payment system for anything from a cup of coffee to a laptop computer and places like Turkey and Scandinavia have also shifted to cashless models. Pakistan has also adopted services like EasyPaisa and JazzCash wholeheartedly, meaning that trading stocks through mobile phones will become easier through these media.

“It can certainly play a role in poverty alleviation. As of now, the main model of investment in Pakistan is buying and selling property for which one must accumulate millions or take out a loan, but with stock trading, one need only save PKR 1000-5000 and deposit that into a mutual fund, or buy a stock through these fintech services and begin growing their money. Hence, the middle and lower classes have a great opportunity to better their lives.”

Siddique’s disdain of cryptocurrencies comes from the history of money laundering and theft and blackmail. He believes they won’t increase the potential for cashless payments as much as they will for further financial crime. Cryptocurrencies have been involved in scandals involving hundreds of millions of dollars and that amount keeps growing each year.

The integration of AI into smartphones and computers has inevitably carried over into finance as well, the true impacts of which haven’t been felt yet. Algorithmic trading (algo-trading) is happening already; programs analyze mountains of data in order to invest individuals’ money into stocks and deposit that money into their accounts. This type of trading is much safer and more reliable than that done through human stock brokers due to the ever-present human error. Machines can go through far more data than ordinary humans can and make better decisions while not giving into emotion or ‘hunches’ that may cost millions.

Some software houses in Pakistan, such as Vision Tech, Catalyst and Softech, are already providing these services to investors, capitalizing on the wave of artificial intelligence popularity sweeping the world right now.

Siddique’s outlook on this is neither grim nor optimistic, but realistic. “I believe the rate at which securities can be traded today, the future can only promise and increase in the frequency of spikes and valleys and booms and busts within the economy. The volume of stock that could previously be traded in a day can today, be traded within minutes. Investors have a lot more control over their money, they are better informed to choose to either buy or dump shares with greater ease. And when computers take over the game completely, the process will become even faster.”

Further innovation at the Stock Exchange involve looking at the NYSE, NASDAQ, LSE and the Shenzhen Stock Exchange as a roadmap to modernize their systems. The new management has already adopted a national, state-of-the-art trading platform and built an in-house data center with multiple power fail safes for complete assurance of continuous trading. “We will also be developing a new smartphone application in the next twelve months that will allow the ‘casual user’ trade stocks through their smartphones. Since roughly 55 million people in Pakistan have access to 3G/4G/LTE services, this will help to increase the reach of the stock market to the ordinary citizen. The application will also allow citizens to swiftly transfer funds to and from the stock exchange and their bank accounts, alleviating the uncertainty and mistrust they associate with the stock market.

Siddique is optimistic about the future of PSX, highlighting the changes planned under new management. These will not only enable the Pakistani Stock Market to become more inclusive but will also allow it to list more companies and gain a higher standing in the international market.

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