Posted by CHRIS UGWU
There is need for increased level of domestic participation in the Nigerian Stock Exchange (NSE) to improve the volume of trades and to encourage local brokers. Chris Ugwu writes
The prevailing situation where only 10 brokers out of more than 200 have continuously controlled more than 70 per cent of total value of transactions in the nation’s local bourse raises a lot of concern
If more dealing members especially the domestic ones are not expanded, the local bourse might face similar situation it witnessed during the global financial meltdown of 2007 and 2008. The meltdown had wiped away trillions of Naira from Nigeria’s capital market, as the All-Share Index fell from a height of 66,000 basis points in March 2008 to less than 22,000 points by January 2009.
Specifically, over N8 trillion or 70 per cent of the total market capitalisation of the exchange was wiped out during the period. Analysts had noted that one of the major causes of the crash in the Nigerian capital market in 2008 was the massive exodus of foreign investors from the equities market, which was facilitated by these top brokers that are the biggest trading houses for Foreign Portfolio Investments (FPIs).
Market watchers believed that the dominance of these brokers appears to be the reasons why they are dictating the tune in the Nigerian market. Hence, anytime they start buying, the bulls return and when they stop buying and take their profit, the bears take over again. This is one of the reasons for the back and forth movements that is being observed in the market.
The dominance has also made some firms inactive thereby compelling them to commit market infractions. This might not be unconnected with the management of the Nigerian Stock Exchange’s intention to get tough with any dealing member firm that is not active for six consecutive months by revoking their operating licenses.
In a bid to stimulate demand and engender competition in the stock broking community, the management of the NSE had in September 2011 introduced the ranking of the brokers by transaction value and volume. As at first quarter of 2017, these top 10 leading dealing firms in the Nigerian capital market ended the quarter with an exchange of 23.728 billion shares worth N355.348 billion.
Checks by the New Telegraph showed that the top 10 Stockbrokers were responsible for 78.07 per cent of the total value between 03/01/2016 and 31/03/2017. Also, the stockbrokers are responsible for 60.01 per cent of the total volume during the period under review.
Further investigations revealed that Cordros Securities Limited dominated with 40.95 per cent or N186.368 billion exchanged in 2.030 billion shares. Stanbic IBTC Stockbrokers Limited followed with N67.928 billion or 14.92 per cent exchanged in 2.393 billion shares. Rencap Securities Limited accounted for N21.621 billion or 4.75 per cent invested in 2.222 billion shares.
CSL Stockbrokers Limited traded N19.459 billion or 4.28 per cent recorded in 1.209 billion shares, while ARM Securities Limited accounted for N15.654 billion or 3.44 per cent in 1.940 billion shares. FBN Securities Limited traded N12.129 billion or 2.66 per cent while Chapel Hill Denham Management Limited staked shares worth N10.055 billion or 2.21 per cent. EFCP Securities Limited traded N8.946 billion or 1.97 per cent while Apel Asset Limited exchanged N6.811billion or 1.50 per cent. Meristem Securities Limited trailed behind with N6.3273 billion or 1.40 per cent.
Issues with local players
The NSE has blamed most of market infractions being committed at the Nigerian stock market on low capitalised brokers. The Chief Executive Officer, NSE, Mr. Oscar Onyema, speaking at a forum, said there was need to place a high barrier to entry, adding that minimum requirement would increase professionalism and make the market to become globally competitive. He said : “It is the smaller brokers that commit most of the infractions because they are not robust enough to do the business. This is economically non-viable due to its low scale and pricing power.
“We benchmark ourselves against other Exchanges and we discovered we have low market concentration, low retail penetration and low institutional flows because of fragmented broker as against other markets that have the participation of global players.” This, according to him, has made the market become unattractive to big players, as well as limits the size of the market.
Market analysts identified volume of transactions as a major challenge facing stockbroking firms in Nigeria. A financial analyst and Managing Director, Crane Securities Limited, Mr. Mike Eze, linked the sharp decline in domestic investors’ participation at the NSE to lack of adequate knowledge of the stock market.
Eze, in a chat with New Telegraph, stressed the need for human capital development in finance that would drive the needed local investors’ participation in the market, deepen it and reduce the dominance of few brokers in the market. He said : “We have serious gap of knowledge and for the market to pick, we need to develop the skill and human capital to drive the market.
Innovations are coming up in the market but the skill to transform it is not there.” He pointed out that foreign and institutional investors who understand the rudiments of stock market are investing heavily in the market.
Eze noted that there is urgent need for marketers that can explain to the local investors’ reasons why they should invest in the market. Managing Director, Securities Africa Financial Limited, Mr. Folabi Afolayan, identified volume of transactions as a major challenge facing stockbroking firms in Nigeria. According to him, institutions, mainly foreign ones, have been dominating the market while the domestic retail investors have not sufficiently returned to the market since the financial crisis of 2008/2009.
He pointed out that there are a few stockbrokers working with these foreign institutions who collectively control the major volumes traded in the market. He said : “Foreign investors are also very sensitive and any information that reflects uncertainty in politics and government policies trigger a fast withdrawal from the market, which results in high levels of volatility.
Need to address the challenges
Eze explained that the challenges can be addressed by developing people that actually understand the financial market, saying that for the economy grow, there is need for human capital development. He called on domestic investors in the nation’s capital market to leverage on the current low prices of stocks of companies quoted on the floor of the exchange for future gains, adding that the market was ripe for investment going by the current low prices of stocks. He noted that it was obvious that activities will stabilise in the market in no distance time, adding that this was the perfect opportunity for investors to stake their funds in the market.
He said : “This is the right time for investors to take part in the equities market, with the prices of shares at their lowest levels. Brokers are confident that with the issue of recession being addressed, the market would begin to stabilise and investors would begin to record significant appreciation on their investments.
“The market still suffers from confidence issues within the domestic sector. We need increased level of domestic participation to improve the volume of trades and to contain the high volatility currently being experienced in the market. Other challenges, according to him, include the issue of brokerage commission, as well as the increase in regulatory costs of doing business.”
Besides, he noted that operational costs or high infrastructural deficit costs is a common challenge across board for anyone running a business in Nigeria. He explained, “as you try to maintain a good and conducive working environment and service a level of redundancy.
Other issues like increasing operational and regulatory costs are quite common to all regulated businesses.” Chairman, NASD OTC Plc, Mr. Tola Mobolurin, also speaking at a forum, said that if local institutions were expanded, they would generate savings within the country, thereby substituting foreign capacity.
According to him, it was desirable for the government to seek how to moderate the destabilising influence of foreign portfolio investors in the Nigerian capital market by boosting increased domestic participation in the market. He said : “We must generate savings within the country to supplement the foreign investment.
We cannot depend on foreign investment if we want to salvage this country.
We need to expand local institutional investment capacity and to achieve this; pension fund administrators (PFAs) must play a larger role to do this. Conclusion Given that the industry is highly fragmented with most of operators lacking both human and capital capacity, it is high time the various processes that have been put in place both by the regulators and other decision makers in the capital market are implemented to encourage and ginger the expansion of local investment base in the nation’s capital market