Liquidity in the Botswana Stock Exchange is expected to improve in the not so distant future after the regulator approved the local bourse’s rules regulating market makers.
The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) last week approved BSE’s draft on market makers which was submitted in 2015, paving way for the stock exchange to set the ball rolling. According to the BSE, the implementation of the rules governing market makers is expected to commence on the first of January next year.
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.
Now with rules regulating the roles of market makers, the BSE is hoping that market makers will inject the much needed liquidity when required to and to mop excess liquidity of any listed company they may be assigned to. This is not a new territory for the BSE as it has dealt with market makers before.
Botswana Telecommunications Limited (BTCL) had to appoint a market maker after it listed on the BSE in 2016. BTCL’s Initial Public Offering (IPO) was the hottest deal of that year, bringing in as many as 50, 000 domestic investors. On the first day of trading, the stock price surged by 30 percent to P1.30, bringing joy to investors whom many of them were first time buyers. Things began to unravel when BTCL declared a loss which was larger than expected, and the market reacted: there was a flurry of trading in the stock with the price taking a hit and ultimately falling to new lows. The share price started stabilising after the telecoms company appointed one of the country’s leading stock brokers, Motswedi Securities, as market maker.
BTCL now belongs to the elite league of stocks that are frequently traded, ranking just below Letshego Holdings. It is expected that with increasing numbers of market makers, companies with less frequently traded stocks will benefit from having market makers, allowing for investors to purchase stocks without worrying much how they are going to dispose of the stocks when the time comes to exit their positions.
The decision to approve BSE’s proposed rules regulating market markers comes at a time when the number of transactions on the domestic bourse is on the decline. Also showing signs of distress is the volume and value of shares traded. The BSE’s benchmark index, the Domestic Company Index (DCI), last had its good run in 2015, delivering average returns of 11.6 percent, before it began its descent, recording losses of 11.3 percent in 2016 and down 5.6 percent last year. The DCI continues to be under pressure: losses for year-to-date is 6.4 percent, while for over a period of two years, the DCI is down 13.3 percent.