New equities’ market structure will Improve liquidity, participation- Analysts

Matthew Otoijagha

The management of the Nigerian Stock Exchange (NSE) on July2, 2018 finally commenced implementation of the new market structure as earlier announced.

In different chats with Stockswatch on the new development, Market Operators generally agreed the new Market Structure is expected to create a level playing field for all market participants and enable investors deploy broader trading strategies, enjoy best execution and benefit from enhanced market depth.

Providing an insight into what gave birth to the new market structure, Kasimu Garba Kurfi, CEO of APT Securities said a chat:

The new market structure:

‘‘You know that by the time the NSE introduced market makers, they came with a market structure whereby market makers were allowed fifteen minutes before opening the price of the stocks, to do what they can do before the opening price of the stocks. Equally, the market makers were given solely one minute to two minutes till the end of the trading to decide what the closing price will be for the day. This has been going on since the introduction of the market makers. And as you know, market makers have had no effects on the entire volume of the market but yet, they have been left to decide what the opening and closing price will be in a day. The Exchange later realised that this takes us nowhere- You’re given privileges against others, yet your effect on the market adds little or nothing to the market. That’s what led to the beginning of the new pricing.’’ Kurfi further explained that the review of the equities Market Structure was subsequently carried out to support hybrid market model which offers the benefits of best execution and tighter spreads to investors. Moreover, it provides potential for cheaper cost of capital to issuers in our market.

Aruna Kebira, who is the Chief Dealer with Gruene Capital Ltd gave graphic details on the new market structure and how it is expected to work.  According to him, ‘‘the new market structure which was introduced to the market July 2nd, 2018 is now having different sessions. Pre-open is from 9.30am-9.55am, which is when Brokers can key in order, change or amend order. The reference prices (that is the previous closing prices of yesterday will be the reference prices for the day). As at this time, you will not be able to see or monitor any stocks, but only your open orders. Then from 9.55am-10am is the time for the pre-open imbalance. Assuming you have N25, 000 on bid side and N15, 000 on the offer side you cannot bid anymore, you can only offer the balance of N5, 000. If you have N20, 000 on the bid side and N15, 000 on the offer side the trading machine will not accept it but will only take the N5000 difference to satisfy the imbalance. Beginning from 10.30 am is the continuous trading period. That is where the traders, market makers and everybody can enter their quotes. At this point the market can now match immediately. Then in the continuous trading period, you have a spread of 20%, which means you have 10% down and 10% up.

‘‘From 2.20pm to 2.25pm, this period is what is called pre-close. At the pre-close period, you will not be able to see the best bid and the best offer. Then at the pre-close imbalance, the market will look at what is called auction. At this point, the market will look at the bid and offer sides and determine the price for the day. That is from 2.25pm-2.30pm.


Expected impact of new structure:

 Aruna Kebira explained that the new market structure is designed to enable market operators enhance liquidity, reduce imbalance, allow price discoveries and also to deepen volatility in the market.

‘In the new dispensation, investors are expected to trade with caution and because you can gain or lose 20% in a day which is for the short term. Now, the new structure is going to reduce holding capacity by investors. People will begin to take advantage of the 20% spread, if they now know that they can make 20% a day. But investors will have to trade cautiously until the new market structure gets into our everyday trading’.


Mr. Dele Sanusi, Stockbroker and market analyst also spoke on the new market structure: ‘‘the structure that has just been introduced by the NSE is just to promote transparency and to make the market spread wide. Before in a day, we normally have what will call 5% up and 5% down, but now we are having 10% up and 10% down and that is what is obtainable now on the floor of the NSE.’’


Likely effects of new structure on investors

According to Sanusi, ‘‘we should know that anything that has merits wills also have its demerits. We should also know that whatever is good may also have one or two things bad about it. If you look at the structure and you buy a stock for very low price, now there is possibility of making 20% gains in a single day, which is a good thing for the investor and also market participants.


‘‘Actually, when the new structure was announced, activities in market suddenly became slow in the first day, the following day activities appeared to be picking, now market activity is increasing with brokers still trying to understand how the new structure will work out.


‘‘As it is now, the market dynamics will define the new structure. This new development is a little bit retarding market activity because everybody is cautious. As time goes on we are to see the long-term effects of the new market policy both on investors and other market players. I can see that we are going to get used to it and also make good profit from it.

‘‘What investors should do now is to get a stockbroker. The brokers on their part should have their due diligence to do in performing their own analysis on market trend. Now, the policy will make both investors and brokers know the real value of a stock before buying into it. The ability of a broker to actually calculate the real value of a stock will give a broker an edge over their peers.’’

Summary of changes to the new Market Structure, as released by NSE:

Opening and Closing Auctions to be followed by Imbalance Sessions (where bids exceed offers, and vice versa). These Imbalance Sessions allow market participants enter Imbalance Orders to address imbalances from the auction sessions.

Expansion of participants in the auction period to enhance fairness and competitiveness of the price setting mechanism.

Introduction of the size test condition in price determination during the auction period; as it currently applies during the continuous trading session.

Changes to the market price volatility mechanism such that daily Limit up Limit down (LULD) price band is now based on a single reference price (i.e., the previous day’s close) to allow for a symmetric up and down limit of 10% throughout the trading day.

According to Nigerian Stock Exchange CEO, Mr. Oscar Onyema, in a recent press statement said, ‘‘Its decision to effect changes in the market making structure in 2018 was part of measures to tackle liquidity constraints and ensure sustained flow of funds in the capital market.

‘‘For the purpose of understanding, market making; the process involves entering bids and offer prices in the automated trading system for securities specified by the NSE as available for market making under its stipulated conditions. Market makers make gains by charging higher offer prices than the bid prices.’’

A Market Maker is Dealing Member of the NSE who has, after being appointed by the Exchange, undertakes to enhance the market liquidity of particular securities in accordance with NSE rules.

The primary role of a Market Maker is to maintain a fair and orderly market in its particular securities and to contribute to the operations of the market by ensuring that buyers and sellers of securities could transact.


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