The Nigerian Stock Exchange (NSE) and the Securities and Exchange Commission (SEC) have released common criteria for licensing of market makers in Nigeria. The new criteria, ostensibly a response to the current global financial meltdown would be a part of a composite strategy to brief relief to investors and prevent a total meltdown of the stock market.
The Nigerian Stock market was rated as the worst performing in the world for the month of January 2009. It has been predicted by some analysts that Nigeria’s Gross Domestic Product (GDP) will drop from 6.3 per cent in 2008 to 3.6 per cent in 2009.
The NSE proposes a hybrid market model that allows for a simultaneous operation of quote and order-driven markets. Under the guidelines, a market maker is defined as “a participant, licensed by the Exchange and registered by the Nigerian Securities and Exchange Commission (SEC), to perform market making activities on listed securities.” A market maker, according to SEC’s rule, is defined as “any specialist permitted to act as a dealer; any dealer acting in the position of a block positioned; any dealer, who with respect to a security, holds himself out as being ready to buy and sell such securities for his own account on a regular and continuous basis.
In plain language, market making involves a broker dealer form. For example, market maker accepts the risk of holding a given number of shares of a specific stock or securities in order to facilitate trading on those securities. Market makers also participate in securities lending. In effect, market makers ensure liquidity in securities markets by standing ready during trading days with a firm asking or bid price for tradeable stocks.
Under the new criteria, an entity wishing to operate as a market maker must be registered by SEC as a market maker. Such an entity must have a minimum paid up capital of N2 billion, in addition to being able to maintain a minimum float of N10 billion at all times.
In addition, the prospective market-maker must have history of successful operations in the stock market or any of the international stock markets. A restriction in the guideline stipulates that the entity cannot simultaneously act as a market maker and stockbroker/dealer. However, it is permissible for a subsidiary or associated entity to perform either of the functions.
Prospective market makers must apply and demonstrate to the Nigerian Stock Exchange that they are proficient in capital market activities and are ready to provide continuous quotes on specific stocks in which they wish to make market. A prospective market maker must make market in at least three stocks across a minimum of two sectors. There shall not be more than three companies making markets in a stock at any time.
A market maker is subject to the rules and regulations of the NSE for dealing members. Trades by market makers must be cleared and settled through the Central Securities Clearing System Limited (CSCS) and the settlement banks. In addition, a bid/offer spread of two per cent would be allowed for market makers and all market makers must carry inventories pending the introduction of stock lending and borrowing.
Other criteria include the requirement that a minimum quote size of 100,000 shares on both bid and offer would be required of a market maker and lastly, no market maker can make market in the shares of a company, which owns more than 29 per cent of its shares capital.
Since the release of the new criteria, SEC has appointed five brokerage houses – Vetiva Capital Limited; Value Capital Limited; Afrinvest Plc, Diamond Capital and Financial Market Limited, and Chapel Hill Dunham – as market makers on the Nigeria Stock Exchange.
However, it would appear that the expected intervention of the market makers in the stock market is being delayed as comprehensive guidelines to govern their operations are still being worked out by the NSE.
ABOUT THE AUTHOR: Dr. Chidi Oguamanam
Dr. Oguamanam is a partner at Blackfriars LLP