‘Why SEC, NSE should co-opt CBN in search for market liquidity’

As lack of positive stimulus in form of policy statements needed to drive demand for stocks remain a source of worry to investors, capital market stakeholders, at the weekend, urged the regulatory authorities to interface with the Central Bank of Nigeria (CBN).

The advise was based on the assessment that there is the need for the provision of a specialised low interest funds for market makers to boost liquidity at the bourse.

The stakeholders, who called for the reintroduction of market making initiative, said the fact that the market was no longer responsive suggested that liquidity was in short supply.

A Market Maker is any Dealing Member of the NSE who has, after being appointed to do so by the Exchange, undertaken to enhance the market liquidity of a particular security in accordance with NSE rules.

They insisted that the equities market is currently in dire need of some kind of intervention because stock prices have bottomed out and are still dipping below their quotation levels.

According to them, investors are not prepared to take long positions in the market, even as stocks had fallen so low that the price attraction was no longer a consideration

Therefore, they suggested that engagement between the officials of the Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), National Insurance Commission (NAICOM), with the CBN should make for a smooth take-off of market making in capital market.

They believed that there was need for something to be done to shore up liquidity in the market, adding that once the CBN issues the necessary policy directive to participating deposit money banks to provide financing to market makers for their operations.

Market Makers play a critical role in contributing to the market quality of The Nigerian Stock Exchange (NSE) by providing improved liquidity and price efficiency, enabling investors to trade in a timely manner.

Market Making involves the act of entering bid and offer prices in the automated trading system for specified security (security specified by the NSE as available for market making) under the conditions stipulated by the NSE. Market makers profit by charging higher offer prices than bid prices. The difference is called the ‘spread’.

In an attempt to deal with the persistent bear run in the stock market, the management of the NSE in April, 2012, released the names of 10 market makers licensed to provide liquidity for the market and support efficient flow of the market.

The approval of market makers was accompanied by the selection of a basket of quoted companies in which the approved market makers are expected to provide liquidity. Each appointed market maker is allotted a basket of 20 exclusive stocks and in addition, the NSE shall in conjunction with the Central Bank of Nigeria explore the possibility of the settlement banks that will provide funds to the market.

The market makers were also expected to stand ready to sell, even if they have to borrow any stock in which they are making market no matter the volume demanded. In this way, market makers support efficient flow of the market by providing underlying liquidity for buy and sell transactions in quoted securities.

The selection of the market makers during the period rubbed positively on the market, translating to a corresponding rise in investor appetite for stocks and the attendant improvement in the market’s benchmark All-share Index and market capitalisation for two consecutive weeks, despite the public holidays during the period.

The 10 stock broking companies selected from a list of 20 that applied were Stanbic IBTC, Renaissance Capital (RenCap), Future View Securities, Vetiva Capital, ESS/Dunn Loren Merrifield, WSTC, Capital Bancorp, FBN Securities, Greenwich Securities and CSL Stockbrokers.

The stakeholders who spoke in a chat with The Guardian at the weekend, regretted that the market making initiative was stalled by high level of volatility, as well as lack of willingness on the part of the banks to provide liquidity to potential market makers.

The Chief Research Officer of Investdata Consulting Limited, Ambrose Omodion, said the only way the market fundamental can be improved and remain relatively stable, is when the market regulators, including CBN, PENCON, NICOM, led by the NSE and SEC, come together to provide funds for the market makers at low interest rate and increase market liquidity as being done in other exchanges of the world.

“This will make the stock market active to attract companies to raise money, expand their businesses and create job that will drive consumption and productivity as well as support national growth.

“Also, the market making initiative would drive increase participation in the market through investment and education that will create more wealth for the citizens.

“The CBN is in charge of funds, all the market regulators, led by the SEC and NSE must liaise with the CBN to provide fund for the registered market makers in the stock market at a cheaper and low interest rate.

“The money would be used to make the market to boost liquidity. It would help stabilise the market and provide liquidity. SEC and NSE should champion it. It will make the market to work effectively. People will come to raise money and expand their businesses,” he said.

The President of Constance Shareholders Association, Mallam Shehu Makail, said said reintroduction of the initiative will enhance orderliness in the market primarily. “It will also enhance market development and performance in the long term as it works to introduce other market initiatives to enhance liquidity and foster investor confidence.”

By this, the market maker for any company’s stock will see to it that the stock is always vibrant in the market.

This means that when the stock over floods the market, the market maker will mop up the stock and offload in times of scarcity.

An independent investor, Amaechi Egbo, said liquidity is a critical component of financial market development.

“As liquidity serves to deepen and strengthen the capital markets, measures aimed at promoting liquidity will have a positive impact on overall market development.

“Growing liquidity is therefore a critical objective for market regulators, exchanges, issuers, and investors. Similar efforts to sustain this initiative in the past was the failure of banks to fully support the initiative,” he said.

He expressed optimism that the reintroduction of the market making mechanism in the stock market would create the liquidity needed to stabilise the market.