Sunday, April 21, 2024

Capital market makers could affect stock closing prices


The Botswana Stock Exchange Limited (BSEL) intends to make further changes to its market making rules, which will result in the changes affecting the closing price of the quoted stocks, the bourse revealed this week.

The BSEL’s market making rules were approved by The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) last year, and came in effect in January this year. Under the current rules, the trades with market makers do not affect the closing price of the stock.

However, upon discussions with experts, and a benchmarking exercise with one of Africa’s most developed bourse the Johannesburg Stock Exchange (JSE), the BSEL has now proposed that trades executed by market makers should form part of the normal order book, thus their prices should be reflected in computing the closing prices of listed entities.

The decision was also based on the fact that Exchange Traded Funds (ETF) and Botswana Telecommunications Corporation Limited (BTCL) market makers already make use of the proposed change.

“The rationale is that Market Makers’ trades are entered into the normal order book with other investors’ trades as they trade with each other and thus impact on the price of securities on an ongoing basis. It would be both meaningless and impractical to separate the reporting of these trades,” The BSEL said in a circular inviting the public to comment on the proposed changes.

The stock market exchange added that the very purpose of a market maker is to inject price discovery into illiquid securities, and “thus separating their trades from the rest of the investors defeats the purpose and may have been an oversight in the drafting of the rules”.

A market maker is an entity that quotes bid and offer prices continuously for

designated securities that it holds in inventory and is prepared and able to buy or sell these securities at any time on its own account as per the market making agreements. Market makers are expected to registered and licensed by NBFIRA.

The BSE which has enjoyed impressive growth over the years, marked by increasing number of listings, has been dogged by the perceived lack of liquidity. Liquidity in the stock exchange – commonly referred to as market liquidity – is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

Liquidity on the BSE has been clamped by the dominance of institutional investors who buy and hold shares with a long term view unlike retail investors whose investment time horizon tends to be short. Institutional investors are large organisations such as pension funds, insurance companies, banks and other funds which pool funds from their members and invest it for returns. On the other hand, retail investors are loosely used to refer to individuals who invest much smaller amounts than institutional investors.

The Botswana Public Officers Pension Fund (BPOPF) dominates the BSE, with its billions spread across the listed companies. Investing through buying shares in listed companies is considered long term investment. However, it could be frustrating for investors who are looking for short term gains. The matter is even made more complicated when there is market illiquidity, forcing investors to put their funds somewhere else where there are better returns. Even listed companies on the BSE have expressed frustrations at their quoted stocks which are not trading frequently, making those stocks less attractive despite the company having strong fundamentals.


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