MarketWatch

[riskreturn]

I would have been more comfortable if both upward and downward prices are fixed, with prices of all stocks put on a sort of "technical suspension", until the uncertainties behind the decision are resolved. It is inappropriate to rule out only downward price movements.

[knightofdelta]

Originally Posted by hokiebear

I think we are being a little too hard on the authorities at the NSE. Extraordinary market interventions by regulatory authorities isn't new and should not be interpreted as "price fixing". For instance, immediately after September 11, 2001, the NYSE was closed for four days and many other markets around the world did the same (so as to prevent investors from taking panic measures). Also, some stock exchanges (such as India's Sensex) have "circuit breakers" to safe-guard investors. The Sensex index suddenly dropping by a given percentage point (10%, 15%, and 20%) would trigger a system-wide suspension of trading for a specific length of time, depending on the severity of the drop.

The NSE freezing a further drop in prices is not necessarily a bad thing if they acted out of a belief that the collective free-fall in the market was due to grossly irrational fears and panic. Whether the chosen intervention measure was the right one for them to take is of course open to debate. The fact is, regulatory authorities are often faced with peculiar, extraordinary circumstances where they have to quickly come up with emergency actions in order to resolve or at least give a temporary reprieve. There is no playbook to read from, and every country may need to respond differently depending on its circumstances. The NSE absolutely needed to do something to restore investor's confidence. To that end, if they did indeed intervene, then in my opinion, they performed their regulatory duties - and that is a good thing.

Well said.

Sincerely I do not agree that the NSE did the right thing by coming up with that idea of an emergency suspension. It is better to let the market take its course. Instead of slamming the breaks on the free fall, they should have done something very quickly about the margin trading issue. Although it is generally believed that plenty of stocks are beginning to sell at reasonable valuations, but there are still plenty more out there that are still over-valued.

A lot of fundamental investors were already getting flustered about the market as a result of these highly priced stocks and it was very difficult to get anyone that made sense at all. It was market correction that was taking place... pure and simple... and disturbing the equilibrium is not a good idea. This suspension is going to give investors false hope and instead of selling, they may start accumulating junk stocks again.

I remember the suspension that was placed on Transcorp sometime last year for no good reason. We all saw what happened after it was lifted... the price fell below its private placement value. I can assure you that whenever NSE decides to lift this suspension, those prices that are bound to crash will come down.

As far as I am concerned this move is going to cause a lot of confusion and those that will suffer most are those that do more of technical investment; the market cycle has been disrupted and the best course of action is to fold our arms and see what happens.

[Apache]

In a rare move, the Council of the Nigerian Stock Exchange on Monday imposed a freeze on the downward movement of stock prices that seemed to confirm regulators’ concerns about the consistent bearish trend in the market.

The significant price losses had been linked to the Central Bank of Nigeria’s directive to banks to suspend lending to support margin trading by stockbrokers and speculators.

Margin trading is the risky practice of using leverage or borrowed funds to invest in securities, which amplifies both gains and losses.

Unconfirmed estimates put the size of leverage in the stock market at 18 per cent or about N2.5tn, and this has been a significant factor in driving prices, especially in emerging markets.

It was learnt that the suspension, which resulted in the rather unusual scenario of 31 stocks gaining in price and none losing at the close of Monday’s trading, would be for one week in the first instance, while the NSE tries to persuade the CBN to rescind its decision.

It was also learnt that top officials of the CBN, NSE and the Securities and Exchange Commission were meeting over the matter, which was aimed at restoring confidence in the market.

Market capitalisation dropped by 13 per cent or N1.65tn on March 6, from N12.64tn to N10.98tn on Monday. The All Share Index also fell by 15 per cent or 9,963.40 points, from 66,371.20 on March 9 to 56,407.80 on Monday.

NSE officials could not be reached for comments on Monday, but stockbrokers said that all stocks that would have been marked down were to revert to the closing price as at June 6, 2008.

Spokesman of the Securities and Exchange Commission, Mr. Lanre Oloyi, said there was “nothing wrong” with the move without elaborating, when contacted on the telephone for comments on Monday.

A leading stockbroker, who did not want to be quoted, said the action was taken to prevent a free fall in the market, which had been under pressure since speculative activity was significantly checked by the dearth of borrowed funds being pumped in by highly optimistic speculators, relying on recent past performance..

“What they have done is not common, but it is aimed at turning around the market. The freeze is for one week, the market has been unnecessarily bearish and the NSE must intervene to an extent. The NSE should not allow the market to be undervalued,” he said.

The Assistant Managing Director, Apex Securities Limited, Mr. Amanze Olisaemeka, said the move was a deliberate attempt by the Exchange to halt the fall of stock prices.

He said, “You know investors have lost over N260bn in the past few days, and through administrative fiat, the exchange decided to checkmate further price losses. But what we should ask is: Does the factor of demand and supply no longer have a role in our market? Can the exchange wake up and freeze stock prices?”

However, the Chief Executive, Financial Derivatives Company, Mr. Bismark Rewane, said it was wrong for the NSE to attempt to rig the market, and described the move as “disorderly intervention in a chaotic market.”

Rewane, who said that while it was true that the market could be heading towards under-valuation, stressed that the decision to freeze prices could trigger a panic reaction from investors, who might want to exit the market once the freeze was lifted.

“What they have done is to introduce circuit breakers without any support,” he said, adding that the NSE and other regulators should have put in place a package to bail out some stocks, which were clearly undervalued to support prices and restore long-term confidence in the market.

He said that freezing the market now was a sign of panic by the regulators, which would make investors panic more.

He also blamed the scenario on the tendency of investors to “gamble” on the market. “If you borrow money at 22 per cent and invest in a market where dividend yield is two per cent, in the hope that prices will appreciate, that is tantamount to calling the stock market a casino, which it is not,” he said.

National Coordinator of the Independent Shareholders Association of Nigeria, Mr. Sunny Nwosu, supported the price freeze on the grounds that investors needed to be protected, while the regulators reviewed the policy on margin lending. This, he said, was aimed at checking the activities of speculators.

While advising investors not to panic, he said the market would continue to swing but would not bust, as Nigeria was still an emerging market with a lot of uncertainties as well as opportunities.

“The market is still growing and is largely speculative; there are a lot of uncertainties and the fundamentals may not really be there, but it will not bust. In fact, this is the time for people to buy at lower prices so that they can soothe some of the pains they are going through now.

“The market will bounce back, even if not up to the levels it was before margin trading was stopped,” Nwosu said.

He said the decision to stop lending for margin trading was taken to protect investors who relied on brokers for all their decisions but that it should be reviewed to allow for more liquidity in the market. - Punch

[hispy99]

Originally Posted by hokiebear

I think we are being a little too hard on the authorities at the NSE. Extraordinary market interventions by regulatory authorities isn't new and should not be interpreted as "price fixing". For instance, immediately after September 11, 2001, the NYSE was closed for four days and many other markets around the world did the same (so as to prevent investors from taking panic measures). Also, some stock exchanges (such as India's Sensex) have "circuit breakers" to safe-guard investors. The Sensex index suddenly dropping by a given percentage point (10%, 15%, and 20%) would trigger a system-wide suspension of trading for a specific length of time, depending on the severity of the drop.

The NSE freezing a further drop in prices is not necessarily a bad thing if they acted out of a belief that the collective free-fall in the market was due to grossly irrational fears and panic. Whether the chosen intervention measure was the right one for them to take is of course open to debate. The fact is, regulatory authorities are often faced with peculiar, extraordinary circumstances where they have to quickly come up with emergency actions in order to resolve or at least give a temporary reprieve. There is no playbook to read from, and every country may need to respond differently depending on its circumstances. The NSE absolutely needed to do something to restore investor's confidence. To that end, if they did indeed intervene, then in my opinion, they performed their regulatory duties - and that is a good thing.

@Hokiebear, (chei, i hope say no be u bring bear come o )

Good post, but I disagree with the need to "fix" prices. Yes, the NYSE and NASDAQ have "circuit breakers" to prevent "panic" selling and a sudden collapse of financial markets. For instance, if the Dow Jones Index(DJI) declines by 10% before 2pm, trading is suspended for 1 hour, while trading is suspended for the entire day if the DJI drops by more than 30% in a single day. The NSE has such "circuit breakers" in place - the 5% price daily limit rule. There is no way the entire market will drop by more than 5% in a single day.

Secondly, note that the operative word in the NYSE and NASDAQ is "suspend trading", NOT manipulate prices. There is a BIG difference in my opinion between the two. What the NSE did was "fix prices" by allowing upswings and dissallowing down movements.

The NSE is down by around 4.75% YTD, the Shanghai index is down by over 30% in the same period. No one was asking for "price caps" when prices were going gaga and people were making money left and right. The chicken has come home to roost (my people help me, did i get that right? ). No amount of price fixing will make me buy some stocks on the NSE because they are just over-valued. Will you buy Livestock Feeds with a PE of 149, or INCAR Nigeria with an "outstanding" PE of 3,165? Vono's PE is winking at me; it is just 18,660 while Nigerian Enamelware is not looking too bad at 207x. Take Nigerian Enamelware as an example. The price was less than N7 in July last year. It is now N88. In my opinion, the price zoomed past the level that its fundamentals support.

There was too much speculation going on in the market. A lot of people thought you could practically double/tripple your money in matter of weeks (yes weeks) in the market. I can remember numerous posts on Nairaland from people that were looking for stocks that will give them 100% in a month.

Market corrections are painful, but neccessary. My own portfolio is very much RED, but I would rather it be red than the NSE trying to bail me out with fixing prices. Price fixes, never work in the end (there are numerous examples from the British attempt to fix the pound's exchange rate in the 1990s to that of the Asian Tigers in the late 1990s). Let the forces of demand and supply rule.

[XXCASH]

Breaking News

The Central Bank Governor, Prof. Chukwuma Solodu, has said the apex bank did not stop banks from giving “margin loans” to customers to acquire shares in the nation’s stock market, contrary to the rumour currently creating worries in the financial sector.
When banks lend money to customers to trade in shares, it is known as “margin loans”.
There have been insinuations that the alleged directive by CBN to banks to withdraw margin loans from stockbroking firms is partly responsible for the current bearish trend in the stock market.
But speaking to THISDAY last night, Soludo said the apex bank did not give any such directive.
He said that the banks’ lending to customers to acquire shares has not reached the level that would warrant any intervention by the CBN.
While banks are allowed to lend to customers to buy shares, they are not allowed to finance the buying of their own shares.
The Securities and Exchange Commission (SEC) at the weekend similarly denied knowledge of any such directive from the CBN.


I have some few issues with this NSE move
- As rightly pointed out, why not a total suspension
- For crying out, NSE should try to inform the public and give reasons before taking this kind of action
The registered shareholders association should work with the national assembly to prevent this from ever happening again.

This our people sef, na long military rule still dey worry them.

[tobenna]

This is some serious s*** as far as I'm concerned.
Freeze all prize movement and not just downward movement for God's sake.

Don't get me wrong, I'm seriously losing money - roughly 13% now.
But it seems as if some top-shot somewhere has lost more money than they can handle and has called Ndi-Okereke or whoever to freeze downward movement. To me, thats what this is.

I have lost all confidence.

Somebody, anybody, convice me otherwise!

[billions]

Originally Posted by hispy99

@Hokiebear, (chei, i hope say no be u bring bear come o )

Good post, but I disagree with the need to "fix" prices. Yes, the NYSE and NASDAQ have "circuit breakers" to prevent "panic" selling and a sudden collapse of financial markets. For instance, if the Dow Jones Index(DJI) declines by 10% before 2pm, trading is suspended for 1 hour, while trading is suspended for the entire day if the DJI drops by more than 30% in a single day. The NSE has such "circuit breakers" in place - the 5% price daily limit rule. There is no way the entire market will drop by more than 5% in a single day.

Secondly, note that the operative word in the NYSE and NASDAQ is "suspend trading", NOT manipulate prices. There is a BIG difference in my opinion between the two. What the NSE did was "fix prices" by allowing upswings and dissallowing down movements.

The NSE is down by around 4.75% YTD, the Shanghai index is down by over 30% in the same period. No one was asking for "price caps" when prices were going gaga and people were making money left and right. The chicken has come home to roost (my people help me, did i get that right? ). No amount of price fixing will make me buy some stocks on the NSE because they are just over-valued. Will you buy Livestock Feeds with a PE of 149, or INCAR Nigeria with an "outstanding" PE of 3,165? Vono's PE is winking at me; it is just 18,660 while Nigerian Enamelware is not looking too bad at 207x. Take Nigerian Enamelware as an example. The price was less than N7 in July last year. It is now N88. In my opinion, the price zoomed past the level that its fundamentals support.

There was too much speculation going on in the market. A lot of people thought you could practically double/tripple your money in matter of weeks (yes weeks) in the market. I can remember numerous posts on Nairaland from people that were looking for stocks that will give them 100% in a month.

Market corrections are painful, but neccessary.My own portfolio is very much RED, but I would rather it be red than the NSE trying to bail me out with fixing prices. Price fixes, never work in the end (there are numerous examples from the British attempt to fix the pound's exchange rate in the 1990s to that of the Asian Tigers in the late 1990s). Let the forces of demand and supply rule.

I am not convinced that what is happening is simply "market correction".

We need to ask the following questions "1.why did the correction not start before the CBN rumour or rule on margin funding 2.Why are the prices of stocks that are not overvalued affected?".

My portfolio is not yet in red(now 10% North) and i am not prepared to see it in red because some cowboys want to turn the NSE to their experimental laboratory where the effect of stupid rules/rumours are tested.

I Agree that it is better for them to suspend trading than to make it impossible for what goes up to come down.

[hispy99]

Originally Posted by Apache

In a rare move, the Council of the Nigerian Stock Exchange on Monday imposed a freeze on the downward movement of stock prices that seemed to confirm regulators’ concerns about the consistent bearish trend in the market.

The significant price losses had been linked to the Central Bank of Nigeria’s directive to banks to suspend lending to support margin trading by stockbrokers and speculators.

Margin trading is the risky practice of using leverage or borrowed funds to invest in securities, which amplifies both gains and losses.

Unconfirmed estimates put the size of leverage in the stock market at 18 per cent or about N2.5tn, and this has been a significant factor in driving prices, especially in emerging markets.

It was learnt that the suspension, which resulted in the rather unusual scenario of 31 stocks gaining in price and none losing at the close of Monday’s trading, would be for one week in the first instance, while the NSE tries to persuade the CBN to rescind its decision.

It was also learnt that top officials of the CBN, NSE and the Securities and Exchange Commission were meeting over the matter, which was aimed at restoring confidence in the market.

Market capitalisation dropped by 13 per cent or N1.65tn on March 6, from N12.64tn to N10.98tn on Monday. The All Share Index also fell by 15 per cent or 9,963.40 points, from 66,371.20 on March 9 to 56,407.80 on Monday.

NSE officials could not be reached for comments on Monday, but stockbrokers said that all stocks that would have been marked down were to revert to the closing price as at June 6, 2008.

Spokesman of the Securities and Exchange Commission, Mr. Lanre Oloyi, said there was “nothing wrong” with the move without elaborating, when contacted on the telephone for comments on Monday.

A leading stockbroker, who did not want to be quoted, said the action was taken to prevent a free fall in the market, which had been under pressure since speculative activity was significantly checked by the dearth of borrowed funds being pumped in by highly optimistic speculators, relying on recent past performance..

“What they have done is not common, but it is aimed at turning around the market. The freeze is for one week, the market has been unnecessarily bearish and the NSE must intervene to an extent. The NSE should not allow the market to be undervalued,” he said.

The Assistant Managing Director, Apex Securities Limited, Mr. Amanze Olisaemeka, said the move was a deliberate attempt by the Exchange to halt the fall of stock prices.

He said, “You know investors have lost over N260bn in the past few days, and through administrative fiat, the exchange decided to checkmate further price losses. But what we should ask is: Does the factor of demand and supply no longer have a role in our market? Can the exchange wake up and freeze stock prices?”

However, the Chief Executive, Financial Derivatives Company, Mr. Bismark Rewane, said it was wrong for the NSE to attempt to rig the market, and described the move as “disorderly intervention in a chaotic market.”

Rewane, who said that while it was true that the market could be heading towards under-valuation, stressed that the decision to freeze prices could trigger a panic reaction from investors, who might want to exit the market once the freeze was lifted.

“What they have done is to introduce circuit breakers without any support,” he said, adding that the NSE and other regulators should have put in place a package to bail out some stocks, which were clearly undervalued to support prices and restore long-term confidence in the market.

He said that freezing the market now was a sign of panic by the regulators, which would make investors panic more.

He also blamed the scenario on the tendency of investors to “gamble” on the market. “If you borrow money at 22 per cent and invest in a market where dividend yield is two per cent, in the hope that prices will appreciate, that is tantamount to calling the stock market a casino, which it is not,” he said.

National Coordinator of the Independent Shareholders Association of Nigeria, Mr. Sunny Nwosu, supported the price freeze on the grounds that investors needed to be protected, while the regulators reviewed the policy on margin lending. This, he said, was aimed at checking the activities of speculators.

While advising investors not to panic, he said the market would continue to swing but would not bust, as Nigeria was still an emerging market with a lot of uncertainties as well as opportunities.

“The market is still growing and is largely speculative; there are a lot of uncertainties and the fundamentals may not really be there, but it will not bust. In fact, this is the time for people to buy at lower prices so that they can soothe some of the pains they are going through now.

“The market will bounce back, even if not up to the levels it was before margin trading was stopped,” Nwosu said.

He said the decision to stop lending for margin trading was taken to protect investors who relied on brokers for all their decisions but that it should be reviewed to allow for more liquidity in the market. - Punch

It would be interesting to see how this will impact trading volume for the next one week.

The NSE is better off focussing its energy and resources on investor education and proper regulation (why has Unity Bank not released results since June 2006 or Afroil was allowed to release those suspicious financials on the floor of the exchange?). You cannot force me to pay a price for a stock that I am not willing to pay, chikena!

[kenebobo]

In my own opinion, I feel the decision by NSE was for the good of the market and the only way they felt could stop this persistent bearish trend of the market is by stopping further fall in stock price which would give investors more confidence to buy and also to hold stocks that have been bought. I believe the final outcome of this decision would have a very good effect on the market.

[billions]

Pls read this informative report!It was written about 2 months ago before the whole thing became such a huge mess.Today,soludo seems to be saying that CBN did not stop margin funds!Whats happening???

CBN stops funding of margin trading by banks
10 April, 2008 12:00:00 ABDUL IMOYO & NSE AKPAN
Font size:
Soludo, Governor, Central Bank of Nigeria Financial sector regulatory authorities, the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC), have directed banks to stop the extension of loans to stockbroking firms following increasing suspicion of insider dealings at the Nigerian Stock Exchange (NSE).

The directive which was issued by the regulators recently is a reflection of the central bank’s continuous monitoring exercise which aims to sustain the stability of both the banking sector and the capital market.
Margin trading involves borrowing money to purchase stocks. It allows the stockbrokers to buy more stocks than they would do normally while the shares are used as collaterals.
A source within the stockbroking community told Business Day that the CBN has directed banks to stop forthwith the extension of loans to stockbrokers specifically for margin trading.
Bismarck Rewane, managing director, Financial Derivatives Limited, who commented on the development, said CBN is not stopping all loans to stockbroking firms but that used specifically for margin trading.
Rewane said what the CBN is against is banks lending disproportionate amount of their total loanable funds for speculative purposes thus starving the real sector of funds that would have gone into production and generation of employment.
“For instance, if banks loan 90 percent of their total credit for speculative purposes and 10 percent to the real sector, is that good for the economy?”
According to him, it is not the fact that banks lend to stockbroking firms that is the issue but the problem is when it becomes excessive in relation to their total loan portfolio.
A market analyst who spoke to Business Day noted that the development was bound to slow down the market. He said share prices would definitely go down just as it would be difficult to determine the intrinsic value of the stocks. He was of the view that the apex bank’s decision could also slow down the entire economy adding that companies should be allowed to leverage on their assets in order to increase the Balance Sheet.
“The decision by the CBN gives an impression that the economy is growing so fast and they are trying to slow it down but Nigeria is still an emerging market and more importantly, the pivot for economic development is availability and access to credit; the ability to refinance whatever assets you have at a point in time”, he said.While maintaining that margin trading could not have encouraged price manipulation in the market, he stressed that the decision could also reduced the ability of the stock market to react to information.He said, “The market thrives on information and at any point in time it is driven by forces of demand and supply. We should always leave the buyer and seller to determine the price and nature of assets to buy because there is always a factor of demand and supply in the price mechanism”.
The analyst maintained that the five percent maximum limit at which the prices of shares could either go up or come down on a daily basis was enough to check arbitrary pricing in the market.
Statistics from the regulators have shown that over N3 trillion or 25 percent of the NSE market capitalisation is funded by margin accounts and this is also partly responsible for the market being overpriced in recent times.
It was gathered that the CBN order actually emanated from a joint decision by a committee, which was set up to look at the impact of margin trading on the alleged manipulation of share prices at the NSE. The committee’s membership is drawn from CBN, SEC, NSE, the Association of Issuing Houses of Nigeria (AIHN) and other market operators.
There is a general belief that those who have access to margin loans jerk up share prices in their desperation to meet up with the interests on the loans and still make profit from the sale of the shares.
In line with the CBN order, the Central Securities Clearing System (CSCS) has stopped the opening of joint account specifically for margin trading. Before now, the joint accounts are usually opened with a representative of the banks as co-signatories.
The source disclosed that the banks decided on the joint account in order to effectively monitor their funds.
“Henceforth, the shares would no longer be used as collaterals, we have been told to provide other instruments as collateral for share purchase loans, because it is suspected that the procedure contributed to price manipulations in the market. You know it would not be easy to get huge funds like before if the loan is not collaterised with the share certificates”, he said.
The market in general has already started feeling the impact of this directive as the prices of some stocks have been on the downward trend for some weeks now since the directive was given. Moreso, the CSCS has been turning down requests with respect of opening of margin accounts.
Lanre Oloyi, head of media, SEC, admitted that there is a committee on margin trading but could not confirm recent decisions by the committee.
Other market operators who spoke on the issue admitted that the development would ensure proper pricing of shares in the market.
It would be recalled that Afroil plc and Capital Oil plc were suspended recently after SEC investigations confirmed that the share prices were manipulated.
The director general of the commission, Musa al’Faki noted that other companies are still being investigated while erring firms would be punished.

[hispy99]

Originally Posted by knightofdelta

Well said.

Sincerely I do not agree that the NSE did the right thing by coming up with that idea of an emergency suspension. It is better to let the market take its course. Instead of slamming the breaks on the free fall, they should have done something very quickly about the margin trading issue. Although it is generally believed that plenty of stocks are beginning to sell at reasonable valuations, but there are still plenty more out there that are still over-valued.

A lot of fundamental investors were already getting flustered about the market as a result of these highly priced stocks and it was very difficult to get anyone that made sense at all. It was market correction that was taking place... pure and simple... and disturbing the equilibrium is not a good idea. This suspension is going to give investors false hope and instead of selling, they may start accumulating junk stocks again.

I remember the suspension that was placed on Transcorp sometime last year for no good reason. We all saw what happened after it was lifted... the price fell below its private placement value. I can assure you that whenever NSE decides to lift this suspension, those prices that are bound to crash will come down.

As far as I am concerned this move is going to cause a lot of confusion and those that will suffer most are those that do more of technical investment; the market cycle has been disrupted and the best course of action is to fold our arms and see what happens.

I cannot but agree with you. This is where the concept of moral hazzard kicks in...if the NSE bails us out this time, they will surely come and bail us out with another "price freeze" in future. So why don't I continue speculating?

There has to be consequences for decisions we make. I have 1 or 2 stocks in my portfolio that I wish I did not buy, but I am paying the price for my "waywardness". Am I happy making losses? Nope, but It's a lesson that I hope to learn from.

[XXCASH]

Originally Posted by hispy99

It would be interesting to see how this will impact trading volume for the next one week.

The NSE is better off focussing its energy and resources on investor education and proper regulation (why has Unity Bank not released results since June 2006 or Afroil was allowed to release those suspicious financials on the floor of the exchange?). You cannot force me to pay a price for a stock that I am not willing to pay, chikena!

For trading the market currently doing close to 8b.

On the low side, the market capitalisation has dropped below 11T