Liquidity constraint, poor incentives stall market-making takeoff
The Nigerian Exchange Limited (NGX) has listed illiquidity and failure to attract the needed capital as major setbacks to the takeoff of the market-making initiative.
Besides, lack of incentives such as enhanced revenue opportunities as well as attractive transaction and regulatory fees are listed as some of the constraints.
Market making occurs when a trading license holder provides continuous two-way quotes both buy or sell prices to the market on selected securities during the trading day.
Essentially, market makers display the amount they are willing to buy or sell a security and the guaranteed number of units. Once they receive an order from a buyer, they sell off from their inventory, ensuring that the order is completed.
Group Chief Executive Officer of the NGX, Temi Popoola, while speaking on the 2023 outlook, said the exchange’s struggle to attract the right capital, in addition to the non-existence of incentives that would attract companies to the programme, were major setbacks to the rollout of the programme.
However, he stated that a new reform that has considered the challenges militating against the effective takeoff of the programme is underway.
Popoola said: “For us to effectively carry out the programme, capital is key and our struggle to attract the right level of capital and risk management has to do with it. Also, to take any risk, you must have incentives tied to it.”
He assured stakeholders that NGX is committed to tackling liquidity constraints and ensuring a sustained flow of funds in the capital market.
“We recognise the importance of liquidity as a driver of participation in our market and are confident that market making will ease the barrier of entry and exit, whilst providing a measure of control over volatile price fluctuations.
“As we continue to consider ways to maximise opportunities across our value chain, our goal is to evolve with the increasingly sophisticated needs of our stakeholders and market making is just one of the strategies we will deploy in this regard,” he said.
Divisional Head of Capital Market at NGX, Jude Chiemeka said the new, reformed market-making platform has a commercial incentive that would allow companies to create needed liquidity.
He disclosed that there were traditional stocks that made it impossible to make the market but added that there is an improvement in the value of trade currently, which would help improve liquidity in the market-making space.
Chiemeka pointed out that the benefits to be reaped from market making cut across the spectrum of the market.
According to him, the market makers should expect enhanced revenue opportunities as well as reduced transaction and regulatory fees in recognition of the responsibility and risks they have taken on.
He said there are also the benefits of increased liquidity, greater market depth, enhanced portfolio diversification, and more, that other capital market players will enjoy.
“To ensure that the market indeed reaps the benefits, we have been painstaking in our selection of Market Makers and we encourage investors to leverage the opportunities they bring to the table,” he added.