THE Securities and Exchange Commission of Pakistan is right to start cracking down on the broker community, but it needs to go much further down that road. At least six brokers have defaulted on their clients`money so far and the fact that this has happened in the midst of a massive bull run in the stock exchange makes the matter even more difficult to digest. Clearly, these parties lacked the ethics and the intelligence to be trusted with other people`s money. The problem is that the SECP chairman, in his latest news conference, mentioned that at least some of these brokers had been on his radar long before the default. At least three separate reports have been compiled, in which the names of some of these brokers are mentioned, yet action came after the damage had been done. In addition, three of the defaulting brokers had been issued repeated warnings for purchases beyond their capital capacity. The fact that the commission is acting is good news, but for the future, we are entitled to expect a faster response if brokers are found to be overleveraged, engaging in illegal badla financing, or participating in manipulative trades.

The managing director of the Pakistan Stock Exchange may be right to point out that the current bull run in the stock market is notbuilt onillegalleverage like previous episodes,such asin 2005, and there should be no panic that it is a bubble. But the clear fact here is that the bull run is largely irrelevant to the actions being taken against errant brokers. Illegal trades of any sort need to be dealt with by a strong response, including stiff penalties and criminal charges if they end in default, whether or not the market is performing well, and the impact that such actions may have on the bull run should be disregarded. If the fundamentals are strong, the market should have no problems continuing with its climb regardless of regulatory action against certain brokers. In due course, the SECP should ramp up its activities to strengthen oversight of IPOs and build up its capacity to act before matters end in default. The disorderly winding up of defaulting positions thatresults after a brokeris unable to meet his liabilities hurts the market far more than any regulatory actions do, and protecting the trust of the retail investor should be the first priority of the regulator.