Since the escalation of the financial crisis in the United States, Europe and Asia, the roles that regulators played or did not play in the crisis have come to the fore. In the US and Europe, questions are being asked about regulators as banks are collapsing and major global economies are staggering into recession.
Of course, the crisis as we all know started with mortgages but quickly became a financial one. From the current financial crisis, it is now becoming predictable that there will be an economic crisis. It is everyones hope that it will not lead to a currency crisis. Having said that, Iceland is already experiencing a measure of that.
It is becoming obvious that global regulators have been doing a lot of catching up. So, rather than leading the economic recovery in the major economies, regulators are busy pursuing bush fires. Especially in the last three weeks, it is now obvious that the most illusive commodity now is confidence. The lack of confidence in the financial market is directly related to the little credibility on offer. Credibility has become a monumental problem as people begin to exercise preference for money under the pillow, rather than cash in the bank, or worse still, leave them in the stock market.
The slogan in global market is now sell, sell, sell. Unfortunately, the situation at the Nigerian Stock Exchange (NSE) is the same. While fundamentals of the global crisis and the crisis in our stock market are different, there are few similarities in the way regulators are doing catch-up.
In our stock market, prior to the down turn that started in March, regulators started screaming on top of their voices on the vibrancy of the stock market when it was an open secret that pyramid schemes type trading existed, as banks bought there own shares to shore up offers, and lent extensively to staff, customers, and stockbrokers during offers. Well, the party has been interrupted, how do we clear the mess?
There now came regulatory measures and initiatives to shore up the lagging stock market. Some of these ideas were mundane but none ridiculous, funny or worse than the one percent downward allowance of share prices on a single day. This measure has created more problems than it sought to solve. Of course, the main attraction of the measure is to slow down the down turn in the stock market.
However, besides prolonging the low confidence in the market and damaging further an already battered credibility of regulators, it is now the cause of illiquidity in the market. My conversation with a stock broker made me realise that the typical stockbroker now gets a sell order of over 90 percent daily. This effectively means that investors are scrambling to get out of the market. As they are scrambling to get out, the market direction can only be one way, southwards.
There are many ways of looking at the effect of this one percent directive. If there was no one percent, investors wanting to cut their losses will not have a problem doing so, as share prices would have bottom out. But, more importantly, because we would have witnessed low stock prices compared to their three year historical value, investors may want to take advantage.
As it is, investors wanting to take advantage of the low stock prices on offer cannot do that. Why? It is difficult for an investor to accurately price its risk in an uncertain market, and the uncertainty has been generated by the one percent downward allowance. Because an entry investor is not sure whether it can sell in six months or a year, based on the fact that investors cannot sell now, such investor is not willing to commit in the market, leading to illiquidity. Liquidity can only be restored by willing buyers but future uncertainty presented by current measures are preventing that. A measure put in place to protect current investors is now preventing future investors from coming in. Let us scrap this rule, it is most nonsensical.
Finally, during the last week, the determination of the NSE to shore up the stock market was reinforced by the plan to establish market makers. I am really at a loss here. Banks and other listed companies that were giving the go ahead to buy-up their shares in a buy-back scheme are now to be market makers and be allowed to buy any shares within a certain spread. Imagine that the job of a Bank CEO now include supporting liquidity in the stock market. While I await the full disclosure of the plans, we must remind ourselves that the stock market is an abstract of the real economy of consumption, investment and employment. Let us improve on those parameters |
