By Nkiruka Nnorom
The protracted bearish run in the equities market coupled with the high interest rate environment have combined to render market makers ineffective, Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, has said.
But while attributing some of the challenges to unfavourable macro-economic environment, he said that positive market environment will greatly impact market making activity.
In a down market, market makers mop up shares from the stock market by providing two-way quotes (comprising of buy and sell prices and quantity the market maker is willing to buy) to the market for the securities they make markets on during the trading day.
Speaking in relation to their impact so far, Chukwu said: “Most market makers do not have the liquidity to make market and until recently, the equities market has been very bearish. So, at a period when equity prices were quite weak, it will be suicidal for anybody to state that he/she is in a position to buy whatever volume is offered at a particular price because at such price, people could dump their entire stock on you. So, in a nutshell, the market makers do not have the liquidity and market has been on a bear run, which will discourage risk taking in the market.
“Another challenge we had was that the macro-economic environment was unfavourable. So, at such point, you are not going to encourage market makers to raise money from the debt market and put in the equities instruments at a time when equities were very weak. What market makers need is a very positive equities market environment, and then availability of credit at a lower rate or at a reasonable rate.”
Continuing, he said: “The Exchange and the Securities and Exchange Commission, SEC, are not in a position to influence interest rate in the economy neither are they in a position to compel banks to lend to the market makers. That will be possible when opportunities involved in market making are economically profitable.”