The absence of Securities Lending (SL) and regulatory limitation to margin lending and loans directed to the capital market remain major challenges for effective take-off of Market Making (MM) activities introduced over two years ago at the local bourse.
In 2012, the Nigerian Stock Exchange in a move geared towards boosting liquidity in the stock market, selected ten Market Makers whose activities were expected to among others, stabilise the market in a bear run, as is currently being witnessed.
Analysts said the absence of Securities Lending at the Nigerian Stock Exchange is a major deterrent for the selected Market Makers like Stanbic IBTC; Renaissance Capital; Future View Securities; Vetiva Capital; ESS/DunnLoren Merrifield; WSTC; Capital Bancorp; FBN Securities; GreenwichSecurities and CSL Stockbrokers.
As the price of oil declines, pressure on forex, and heightening political risks continue to affect the performance of Nigerian stocks.
Analysts also observed that vibrant Market Making, driven by Securities Lending activity is capable of cushioning the effect on increasing sell-side at the equities market, which has pushed the return from the Nigerian stock market further negative, by 17.91% evidenced in last weekend’s performance. The lost value of equities is currently in excess of N2trillion year-to-date (ytd).
Market Making is the act of entering bid and offer prices in the automated trading system, for a specified security under the conditions stipulated by the Exchange; while Securities Lending is the market practice of temporarily transferring securities for a fee, from their holder (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender, either on deman,d or at the end of the agreed loan term.
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A market maker at IMC Financial Markets, whose primary role at New York Stock Exchange (NSYE) is to provide liquidity and improve market efficiency, recently told BusinessDay at the NSYE trading floor, that; “My role here is to stabilise the stock market, particularly in a bear market”.
He said, “In a bear market, we support the buy side. We are neutral players in the stock market because we play in both bear and bull markets. When investors are selling stocks, we provide liquidity to support stock prices.
“ We don’t warehouse stocks because we sell-off when there is demand.” IMC makes markets in the major exchange traded instruments – equities, bonds, commodities and currencies.
“Let me state from the onset that the existence of Market Makers in itself neither guarantees liquidity nor market stability, as the incentive structures and strength of the market makers in playing their role is crucial. “Notably, the absence of securities lending and short selling (be it naked or covered short selling) limits the strength of market makers, who apparently have relatively weak internal capital position to provide the much needed support or liquidity to the market,” said Rasaq Abiola, an analyst at Lagos-based Associated Discount House Limited.
Abiola added, “In addition, neither the market makers nor the supplementary market makers are adequately incentivised to take the risk of market making in the Nigerian equity market.
“For instance a waiver/notable reduction of NSE and statutory fees for market makers, may help stimulate appetite for such risk-laden exposure, especially in bearish times. Thus, I do think all stakeholders need to collaborate on making securities lending work and regulators need define appropriate incentives for market making to get the much needed impact of the appointed market makers.”
“We have market makers in Nigeria but they are not functioning because some of the processes for proper functioning are not in place yet. For instance, we need securities lending and proper funding. With regulation limiting margin lending and loans directed to the capital market, it has been difficult to operate market making,” said Femi Ademola, head, research and intelligence, BGL plc.
Iheanyi Nwachukwu
