Nigeria Content Online

Two recent
proposals are being discussed at the Nigerian Stock Exchange (NSE) with
brokers and regulators that would have far reaching implications for
the market. They would also have a revolutionary effect on investor
confidence and trading.

The first is the
proposal to migrate to a modern platform of Straight Through Processing
(STP), designed to eliminate settlement risk and ensure that all trade
settles cash versus securities. In other words, there will be no failed
trade and all trade ideally will settle same day.

This means that all
cash settlement will go straight to investor bank accounts, thus
eliminating the nagging issues of rogue brokers, who sell their
client’s shares without authorisation. This has been a major confidence
issue with some investors before and has contributed to labeling all
brokers as fraudulent, even though the records show that only few
brokers are involved in these condemnable acts.

For example, the
requirement for investor bank accounts, that will be tied to a CSCS
account for every investor, will enhance the ‘Know Your Customer’ rule,
as it will be another check for knowing who the account holder is. It
will eliminate mystery investors who launder money through the stock
market.

This has been a
major omission in the past. No one can open a brokerage account today
in any advanced market, without a corresponding bank account to keep
records of the inflow and outflow of cash. There is also the added
benefit to stock brokers, as it will eliminate customer payment duties
in their back offices, leading to more efficient back office operations
that are a major challenge for small broker offices, which currently
rely on manual processes that is fraught with errors and delays, with
the attendant client dissatisfaction. The resulting back office
efficiency will enhance broker income and allow focus on the more
important aspects of their functioning in the market.

The combined
benefits of implementing the programme and the expected results will
increase trading volumes and investor confidence, which should
translate to liquidity. The New York Stock Exchange, when it adopted
STP in 1995, after a 203 year history, witnessed huge volume increases.
It ushered in a new era with automated trading of this type and
shortened processing time; we expect the same to happen here.

Interestingly,
implementation will have minimum disruption, since all that will be
required will be for clients to submit their bank accounts to their
brokers, who will cross check their validity with the banks.

Improving trading economics

The other proposal
is aimed at improving trading economics by expanding the current
trading band. I see this as another forward looking proposal likely to
move the market forward quickly. Many analysts have questioned the
rationale for limiting the price movement to a daily plus 5 percent up
and minus 5 percent down, and have called for its elimination.

That seems drastic,
and may bring about volatility that we may not be able to manage. The
new suggestion to move gradually by increasing the current position to
plus 10 percent up and 10 percent down has my support. The current low
volume of trade and sluggish upward movement of prices means no
profitable trade can take place.

Even though average
daily volume has increased since the crash of 2008, the price decline
has meant average trading value has remained below 2007 and 2008
levels. This has affected broker/NSE revenues. By widening this trading
band, we will see increased activity, as investors will be more willing
to trade their accounts.

This will also
dramatically improve liquidity and provide a basis for the current
stabilised market prices to appreciate more steadily and give room for
faster correction of bubbles when they appear, as investors and brokers
trade to take profits quicker and correct market imperfections in stock
prices.

Margin guidelines

The margin
guidelines jointly provided by the Central Bank of Nigeria and the
Securities and Exchange Commission seem to be an overreaction that will
produce the bubble in share prices in the future if corrections are not
made before implementation.

First, they want
all bank stocks eliminated from margin lists for margin financing
purposes, a situation that affects 60 percent of market capitalisation.
Second, they want a 50 percent maintenance limit and then 10 percent
market cap on exposure to margin lending within banks portfolios.

While some of these
are best practices, concentrating margin financing to only 40 percent
may lead to the situation where the most liquid of these are the only
stocks banks will agree to finance, leading us back quickly to bubble
prices.

The second half of
the year 2010 has already showed evidence of what is likely to happen;
second half volume is lower than the first half for same period last
year. The advances/decline ratio is also reduced, while cumulative
volume for the year which was looking promising to exceed 2009, is now
weakening and may barely match 2009 levels.

I think the
appropriate thing will be to use percentage guides, for example, no
margin financed portfolio should carry more than 25 percent bank
stocks.

There is also the
need to fast track introduction of the margin list, as this will give
clarity to this aspect of the market and reduce panic selling. The
market needs to be sensitised to the technical details of how margin
accounts work, and how it will operate under the new guidelines. It
should be clear that margin accounts are an important part of the
market. They were not the problem, but their operation.

Victor Ogiemwonyi is the MD/CEO of Partnership Investment Plc, Lagos.