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Analysts raise concern on hindrances to market making


Existing price limits, low market depth, weak human capacity and current operating structure of the market have been identified as factors that could hamper the success of market making, Analysts at United Bank for Africa said.

Nevertheless, the analysts, believe that a proper implementation of the strategy could reduce volatility, facilitate liquidity in the Nigerian financial market and increase market depth, adding also that changing the current operating structure of the Nigerian Stock Exchange from the order driven to a quote driven system is critical to the overall success of the strategy.

The Analysts — Kayode Fadahunsi, Michael Nwanolue and Philip Etim, all of UBA — in a report on the Nigeria Stock Exchange’s introduction of market making, said, “While we believe that market making can be applied to improve the workings of the equity market, we expect it to present a few challenges such as; the poor execution of clients’ mandate, the misuse of privileged information, high cost of switching or crossing stocks between accounts amongst other regulatory bottlenecks.”

However, to provide an enabling environment for market making to thrive, they recommended that, “market infrastructure be upgraded to global standards – we understand the current stock exchange system can easily be switched to a quote driven system; trading hours be further extended to enhance the free-flow of trades; the revised price limits of (+/-) 10% be applied to all listed equities; a legal framework be instituted to settle disputes; more well capitalized market makers be approved for each stock to reduce unnecessary dominance by any single market maker; stakeholders should be properly enlightened on the workings of the strategy; and proper regulatory oversight be provided to prevent market makers from taking undue advantage of privileged information,” the Analysts said.

Management of the Nigerian Stock Exchange, NSE had announced that it would allow market making to commence on September 18, 2012. The equity market regulator had, in April 2012, approved the appointment of ten Primary Market Makers (PMMs). For starters, the NSE has approved a list of twelve equities with which the PMMs will test-run the initiative over the next six months.

Market making involves a broker-dealer firm i.e. market maker, accepting the risk of holding a given number of shares of a specific stock or security in order to facilitate trading in that security.

A market maker displays the bid and the offer quotes/prices for a guaranteed number of shares. When an order is received, the market maker sells from its inventory or seeks an offsetting order. Essentially, market makers keep the financial markets running efficiently because they are willing to quote both bid and offer prices for an asset.


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