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Anxiety over ‘Market Makers’ initiative

By Peter EGWUATU
There is anxiety over the fate of the ‘market makers’ rescue initiative for the capital market given the focus of the regulatory authorities on  the proposed asset management company (AMC).

The ‘market makers’ initiative was introduced last year  by the Securities and Exchange Commission (SEC)  to stem the declining fortunes of the nation’s stock market. The market markers were supposed to provide liquidity to drive transactions in equities listed on the stock market.

Consequently six firms were registered as market makers namely Chapel Hill Denham, Diamond Capital & Financial Market Limited, a subsidiary of Diamond Bank, Greenwich Advisory Services, a member of the Greenwich Trust Limited, BGL Limited,  Value Capital Limited and  Vetiva Management Limited.

Capital market operators observed that since the six were appointed nothing has happened and SEC and the Nigeria Stock Exchange (NSE) are now only concerned with supporting the AMC initiative. Vanguard reliably gathered that the market makers could not commence operations due to inability to get liquidity providers and the fact that SEC was yet to put in place rules on securities lending.

“It is like SEC has scrapped market makers as nothing has been done since it registered the six market makers. What SEC and NSE are concerned now is the support for AMC. They no longer talk about how to make market makers work in the nation’s stock market.” An operator told Vanguard on condition of anonymity.

Another operator said, “It is like the issue of market makers have been buried because the companies that were registered seem to lack liquidity now that banks are no longer willing to neither grant nor guarantee any loan on shares. It is a general belief that only firms that are affiliated with banks can eventually become market makers when confidence might have returned to the market.

“But there is also the fear that the AMC may end up like the market makers initiative. This is because of the agitation by stockbrokers that the proposed AMC arrangement was meant to provide a soft landing for the banking industry at the expense of other sections of the finance industry.”

SEC and NSE however dismissed these concerns saying the ‘market makers’ initiative has not been suspended.
Mr. Lanre  Oloyi spokesperson for the SEC said, “The Commission has not scrapped market maker. The registered market makers are still there.”

Similarly, Mr. Sola Oni, spokesperson for the NSE said, “The Exchange has not ruled out market makers. They are expected to enhance the much needed market liquidity. We want them to show us evidence of their liquidity provider. It is part of their requirements before they can operate in the stock market. Even though they said they have liquidity provider, we want the CBN to approve it”.

It would be recalled that though the SEC set the minimum capital base of the maker makers at N2 billion, the NSE however requires that a capital base of N10 billion. According to the Exchange N2 billion is inadequate to effectively take care of the problem at hand.

The NSE Director-General, Prof. Ndi Okereke-Onyiuke had explained that intending market maker “must have enough liquidity with documentary evidence of a liquidity provider like a bank, insurance company, and pension fund administrator, among others to be licensed.” Among other things the SEC guidelines for market maker requires interested companies to register with the Commission and the Corporate Affairs Commission (CAC). According to the Rule 31(c) of the Commission, a Market Maker is required to have  N2 billion paid up capital and maintain sufficient liquid assets to cover its current indebtedness. Such role must also be stated in its Memorandum and Article of Association “that it can deal in securities in the capital market.”

An intending market maker is also required to register as a member of the NSE, as required by the enabling rules and regulations, aside from complying with the code of conduct of capital market operators and maintain a Fidelity Bond in line with provisions of Rule 45, among others.

A market maker is required to “be a specialist in designated securities and hold itself out (by entering quotation in an inter-dealer communications system or otherwise) as being willing to buy and sell the designated securities for its own account on a regular or continuous basis.”

Such a firm is also expected to ensure continued liquidity in the market at all times, while serving as a source of market information for the designated securities for which it stands ready at all times. It is also expected to facilitate a smooth trading atmosphere and engender market stability as well as promote price discovery.

The market maker, according to the rule is under obligation to stabilise the market by ensuring continued liquidity, operate within the established bid and offer spread of a maximum limit of three per cent, subject to review. It is also expected to have the capacity for two-way quotes in relevant stock throughout the trading session on a minimum quote size of 100,000 units of shares.

It is also under obligation to “have the capacity to deliver and settle transactions within the prescribed (T + 3) settlement cycle.”


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