HOW FAIR AND TRUE CAN EMERGING STOCK MARKETS BE?

Some decades ago, at the Nigerian stock exchange, under the call over system with manual erasing and writing of new prices on the board, prices could be made even if you have no shares and stocks to sell or buy.

The call over chairman retained the right to disallow any price changes and even any deals struck. Most times, whenever he deemed it fit, he asked any price maker to defend the new price and also check the order books of stockbrokers to be sure there are truly instructions to sell or buy.

Of course, the system contained potential for abuse. For example, a willing call over chairman could rubber stamp deals that were not actually made on the floor especially when it involved scarce and highly sort after equities.

Also, many companies had arrangements with choice stockbrokers to defend their prices at the market relative to competitors prices and overall market trend.

This was because, then new prices can be made not only when you want to sell but also when latest macroeconomic and corporate development warranted same. Thus brokers defended new prices by referring to latest corporate reports , likely impact of new policies or both.

Now we are in the electronic age where trading is done on line and there is no physically present authority vested with the right to disallow or allow new prices made.

Whether at the Nigerian stock exchange or Nairobi securities exchange that Henates has been analysing for a while now in this blog, brokers now make new prices only when they have minimum quantities of shares in particular companies to sell.

So long any listed company records no selling or buying interest, the chances are that its price per share will remain firm, no matter if the roof is coming down on the sector it belongs due to new government policy or enabling environment or if fortunes have drastically changed for such a company.

Hence, for example, many insurance companies still retain their years old prices at the Nigerian stock exchange despite recent change in the pricing rules that placed par value bottom on price per share. The same with some equities listed on the Nairobi exchange at values that hardly change because they are rarely dealt in.

In the end, how fair indeed can such prices be to investors? How far do prices made only when you have units to sell can be reflective of the true fortunes, and even the supply and demand pattern for equities?

It is had to tell but one thing is obvious: Some times in an emerging market investors do not rush to sell or buy because of new realities more because they are ignorant or because they invested without clear cut investment objectives.

So in the absence of a call over chairman who tasks brokers to defend new prices, how can electronic prices be made to reflect better true perspectives of potentials of listed companies in an emerging market that has very few listed companies and inadequate investor knowledge of market and listed companies fundamentals?

At the Nigerian stock exchange, Henates understands that the rules and regulations department is trying its best today to be the market's call over chairman. They are using the same electronic tools to monitor the market daily to drive it towards higher level of perfection as a regulated market. 

Henates guess is that the same applies at the Nairobi exchange and perhaps other emerging African markets, but the fact still remains that review after the event can not suffice where instant decision on new price is needed.

Only high and low limits to price changes can be enforced but  the whopping drop today and fantastic rise the next day witnessed in some of the listed equities in these times without earth shaking changes in fundamentals including enabling environment;  supply or demand remains reminder that there is still a long way to go.