The new cap on stock price movement recently released by the Nigerian Stock Exchange (NSE) for operators at the nation’s capital market will make the equities market more attractive to speculators for short capital gains, BusinessDay has learnt.
Analysts who spoke with BusinessDay said the regulator’s plan to allow all stocks price to move up to 10 percent daily, from the current 5 percent cap, is at variance with long-term funding philosophy, which the capital market stands for.
There are regulatory plans to allow all stocks price to move up to 10 percent daily in addition to stocks already in the market making basket.
Going by the current recovery of the market largely driven by huge capital inflows occasioned by loose money in the advanced economies and significant ‘carry trade,’ the analysts say the development which increased the limit on price movement any particular stock can record in any trading day is premature, and could erode the gains recorded so far in the market.
“The potential to make up to 10 percent gain in a single day attracts ‘hot money’ into the system and raises stock prices rapidly. But just as in 2008, this means the stock market would crash, just as rapidly in the event of a reversal of flows,” said Sanusi Lamido Sanusi, governor, Central Bank of Nigeria (CBN), at the recent Monetary Policy Committee meeting.
“First, it is evident that the recovery of the capital market is driven, in large part, by those huge inflows. The problem is magnified by what, in my view, was a premature decision to increase the symmetric limit for daily stock price movement from 5 percent to 10 percent,” he said further.
The NSE had last September, while introducing market making programme, lifted the 5 percent ban on share price movement of stocks in the portfolio of market makers top 10 percent, to allow for more activity in the stocks. The exchange is expected to extend the 10 percent ban on share price movement to include other stocks not covered by the market makers by any moment from now.
However, Johnson Chukwu, managing director, Cowry Asset Management Limited, while acknowledging that its implementation is capable of aligning the market with other global stock exchanges, said “the new price movement limit has made the Nigerian equity market more attractive to speculators as it now presents better opportunities for quick short-term capital gains with corresponding threat of capital losses.
“The threat of quick capital losses could discourage some retail investors in Nigeria who are not well informed about the market dynamics.”
Ken Iwelumo, former senior vice president, Investments and Senior Financial Advisor (Stockbroker), Bank of America/Merrill Lynch, said “restrictions on the price movement of stocks encourage the worst forms of speculative hot money into Nigeria, as foreign portfolio investors such as hedge funds employ complex computer models and algorithms to arbitrage the slightest anomalies in the prices of stocks at the NSE.
“The new price movement limit has made the Nigerian equity market more attractive to speculators, as it now presents better opportunities for quick short-term capital gains with corresponding threat of capital losses. The threat of quick capital losses could discourage some retail investors in Nigeria, who are not well informed about the market dynamics.”
Iwelumo further noted that in the past Nigerian stock brokers and investors made money from imperfections in the NSE, such as the lack of access to information and trading on insider information, adding that “once trading on the NSE is free and fair to all players, then a lot of the current negatives will fade away.”
In his reckoning, “NSE will never be a major world exchange until the activities there are totally transparent, free and fair to all players. There should be no restrictions on the up or down movements of stocks.”
BY OUR REPORTER
