©Department of Banking and Finance University of Ado-Ekiti, 2000 Published for Department of Banking and Finance University of Ado-Ekiti. by Forthright Educational Publishers (A Division of Forthright Consult Limited) 4, Majaro Street, Onike, Yaba. c/o P.O. Box 166 Unilag P.O., Akoka NIGERIA. The Nigerian Journal of Banking and Financial Issues '(NJBFI) provides a unique forum for the articulation and dissemination of applied research by academics and professionals in the field of Banking and Finance or related disciplines. It is bi-annual journal published by the Department of Banking and Finance University of Ado-Ekiti, Nigeria. The Journal contains analysis of banking and financial issues relevant to the Nigerian economic experience and financial policies. Opinions expressed herein are those of the authors and not necessarily those of the Department of Banking and Finance or Forthright Consult Limited. All rights reserved. No part of the publication may be reproduced or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise or stored by any retrieval system of any nature, without tht prior written permission of the copyright bolder. ISSN 1119-8494 Subscription Rate: Nigeria: Students - N300.00 Others - N500.00 Foreign: - US$10 Printed in Nigeria by Forthright Educational Publishers, Lagos. Nigerian Journal of Banking and Financial Issues Vol 3 No. 1.91-100 THE IMPACT OF AUTOMATION ON THE NIGERIAN STOCK EXCHANGE Jackson O. Olujide* Introduction The Nigerian Stock Exchange' has made strong strides in the last decade as a result of key financial reform decisions taken in the last few years and the increasingly positive steps towards good governance. Furthermore, some infrastructure continues to be laid for favourable operation of the stock exchange nation-wide. These efforts and successes to date have, already begun to demonstrate that dividends are payable from system wide reduction of financial repression, removal of financial asphyxiation and from the exercise of financial and fiscal disciplines in the management of the country's economy and resources.. As a result of the reforms of the last few years, the Nigerian Stock Exchange has no doubt achieved remarkable growth within the last two decades of its existence, there has also been enormous expansion hi its operations in terms of wider operational coverage. These developments have increased substantially the volume of transactions and range of services offered to the public. In addition, the Stock Exchange in concert with other facilitating institutions provide employment opportunities for Nigerians as well as encouraging the acquisition of knowledge, skill and professionalism in stock brokerage. The Stock Exchange therefore represents a veritable vehicle So the continued operation and attraction of foreign capital for life nation & development. But in spite of the string of aforementioned achievements, there is the general feeling that the Nigerian Stock Exchange is still underdeveloped therefore not yet "in a position-to contribute effectively to the development needs of the economy. The underdeveloped nature of the Stock Exchange is reflected in its system of trading. The Nigerian Stock Exchange operated the "call-cover" system of trading from inception to 1997 due to the paucity of securities dealt in. and the comparatively small size of the market. In this call-over system, securities are called individually and members (stock brokers) indicate interest whether to buy or sell. During the call-over-days of trading, it took investors an average of six months to get share certificates from Registrars to quoted companies. This situation has made it possible for an investor to maximise possible opportunities in the market arising from price fluctuations. Dr. Jackson O. Olujide is of the Dept of Business Administration. University of llorin. Automation and the Nigerian Stock Exchange 92 However, in April 1997 a new trading system called the Central Securities Clearing System (CSCS) was introduced. This system makes it possible for an investor to deal on securities bought five days after the transaction day (i.e., T + 5 = transaction day plus five days). Thus this automated trading system which makes it imperative for the CSCS to clear and settle all transactions on the stock exchange within T+5 days has eliminated all manual processes of trading on the exchange. The manual system of trading causes a lot of delay in the issuance of share certificates by company Registrars to investors consequent on a secondary market transaction. Therefore, most Nigerian investors are obliged to be content with dividend payment and bonus issues rather than earning more income from price fluctuations. The situation has led to a very low volume of trade over the years as reported by the Nigerian Stock Exchange in its fact book 1999. This is a consequence of the manual clearing system. Other drawbacks of the manual trading system include; delay in issuing share certificates to shareholders cancellation of share certificates of selling shareholders and issuance of new share certificates for a buying shareholder per transaction. Constant signature verification before sales is allowed. Dealing members were short-selling Failed transaction Loss of share certificates, and so on. From the foregoing therefore, this study is designed to examine tit impact of automation on the volume of trading on the Nigerian Stock Exchanges' Specifically, the study intends to achieve the following objectives: (a) To determine the average annual volume of shares traded on the Nigerian Stock Exchange during the call-over system of trading. (b) To determine the average annual volume of shares traded on the Nigerian Stock Exchange after the introduction of CSCS. (c) From (a) and (b) above, to determine the impact of automatic on the traded volume of shares on the Nigerian Stock Exchange. Institutional framework The Central Securities Clearing System The last decade saw monumental changes in economic environment propelled by major technological innovations in telecommunications and information technology resulting in integrated world financial markets with the emergence of globalisation or cross-border investments. In 1988. the Federation of International Stock Exchange (FIBE) of which the Nigeria Stock Exchange is a member, commission a group of thirty (G 30) experts to undertake a study of world stock markets. The nine (9) Nigerian Journal of Banking and Financial Issues 93 key recommendations of the G-30 have become global stock market yard stick for clearing, settlement, depository, registry and custodian systems. In view of the foregoing, the Nigerian Stock Exchange on July 29, 1992 incorporated a subsidiary company called Central Securities Clearing System Limited with a mission to speed up the delivery system of the Nigerian Capital Market through the introduction of efficient, effective securities, clearing, settlement and custodian mechanisms with minimum risk. This was to be achieved by the implementation of the Stock Exchange Management System (SEMS) software application package. The SEMS is a four (4) module package: • Clearing/Settlement: Depository/registry (CDS) system: Custodian services • Board and automated trading and market control and surveillance • Broker management and licensing and stockbrokers banks • Corporate profile management and statistics including INDEX. The Central Securities Clearing Systems Limited was commissioned on April 8 1997 and commenced operations on April 14 1997. The CSCS, in addition to clearing and settling trades, functions as: - Central depository for share certificates of companies quoted on the Nigerian Stock Exchange. - Sub-registry for all quoted securities (in conjunction with registrars of quoted companies). - Issuer of central securities identification numbers to stock holders - Custodian (in conjunction with members) for local and foreign instruments. The system operates a T + 5 settlement cycle for transaction on the exchange, in conformity with the FIBE standard for emerging market to which Nigerian Stock Exchange market belongs. The T + 5 (transaction plus five days) settlement cycle is facilitated by the immobilisation of share certificates in a central location which in turn enables transaction to be processed in an electronic book entry form. Thus, physical delivery of share certificates for secondary market transactions to fulfill settlement obligations has been replaced by electronic credits and debits to shareholders stock positions. Benefits of the CSCS include among others: - Reduction in incidence of loss or stolen share certificates - Elimination of late delivery of share certificates - Reduction in the cost of maintaining register of share holders - Increased liquidity of stock - Increased transparency of market - Increased market turnover - Encourages foreign investments - Ensures prompt inter-broker money and stock settlements Automation and the Nigerian Stock Exchange 94 - Increased efficiency and profitability of stockbroking firms Reduction of operating costs. To maximise the gain of the Central Securities Clearing Systems Limited, the call-over trading system was in April 1999 replaced with the automated trading system with bids and offers of securities no\v matched by stockbrokers on. the trading floors of the Stock Exchange .through a network of computers. Secondary market transactions are now consummated by stock brokers through the use of computers within the hours of 11.00a.m. till all bids and offers have been executed (about 1.30p.m. on the average). Research methodology The Nigerian Stock Exchange is not the only institution in the capital market, but it is the only capital market institution in which both the. central securities clearing systems limited (CSCS) and Automated Trading System (ATS) are relevant, being the only market in which transactions on quoted securities are perfected. It then •fits in perfectly into the objectives of this study. And therefore, represents the study sample. The main source of data for the study is the secondary source. Information was obtained from both internal publications of the Nigerian Stock Exchange, such as: the Nigerian Stock Exchange Factbooks the daily official list of the Nigerian Stock Exchange: and also from external sources such as Publications by the central securities clearing system limited. Data obtained were analysed by the use of simple percentages in order to highlight trends and summarise result; The parameters considered in this analysis include: Market capitalization Number of shares traded Daily average volume Number of stock broking firms Number of listed companies Number of listed securities Data analysis and discussion of results The results of our data analysis based on the above parameters are presented as follows: ' 95 Table 1 Market Capitalisation Year Post ATS 1999 Pre ATS 1998 Market Capitalisation 287.2 billion 260.8 billion % Change 10 Table 1 shows a pre-ATS market capitalisation of N260.8 billion in 1998 rising to N288.2 billion during the six months post-ATS in 1999. This represents an increase of 10%. Table 2 Percentage Changes in Market Capitalisation Year Market Cap. (N Billion) % Increase 1998 263.3 461 1997 292.0 523 1996 285.6 509 1995 171.1 265 1994 65.5 40 1993 46.9 ~ 1993 was taken as the base year for the purpose of this analysis. Figure 1: Market capitalisation (N billion) 96 Table 3 Number of Shares Traded Year Number of Shares Traded (N Billion) % Increase 1998 2.1 343 1997 1.3 174 1996 0.882 86 1995 0.397 -16 1994 0.524 10 1993 0.473 The percentage increase was obtained using 1993 as the base year. Figure 2: Number of Shares (in billions) It is evident from Table 3 that the volume of shares traded increased substantially in 1996 following the de-regulation of the market and much more in 1997 after the introduction of the Central Securities Clearing System. The study also considered the total number of shares traded on the exchange in the half-year period (January - June) 1998 and 1999 Table 4 Percentage Changes in Number of Shares Traded 1 /2Year (Jan-Jun) No. of Shares Traded (Million) Post ATS 1999 965.9 Pre ATS 1998 738.3 Percentage Change 30 -- Nigerian Journal of Banking and Financial Issues 97 Turnover on the exchange during the six months ended June 1999 stood at 965.9 million shares, up by 30% due to the successful transition to the Automated Trading System (ATS). Table 5 Year 1998 1997 1996 1995 1994 1993 D.A.V. Million 8.4 5.3 3.5 1.6 2.1 1.9 % Increase 342 179 84 16 16 - Figure 3: Daily Average Volume Table 5 shows that there was a significant increase in the average number of shares traded on the floors of the exchange in 1997 and 1998 following the deregulation of the market and introduction of the Central Securities Systems Limited. The pre-CSCS rate of increase ranges from 10% to 84% between 1993 and 1996 while for the post CSCS years it was between 179% and 342% in 1998. Year 1998 1997 1996 1995 1994 1993 Table 6 Number of Stock broking Firms No. of Stock broking Firms 226 217 162 162 140 140 % Increase 61 55 15 15 0 - Automation and the Nigerian Stock Exchange 1993 1994 1995 1996 98 1997 1998 Years Figure 4: Number of Stock Broking Firms Table 6 shows an improvement of between 55% and 61% in the number of stockbroking firms involved in daily market transactions on the floors of the Nigerian Stock Exchange in 1997 and 1998 respectively sequel to automation introduced in 1997. Year 1998 1997 1996 1995 1994 1993 Table 7 Number of Listed Companies No. of Listed Companies % Increase 186 6.7 182 4.6 183 5.1 181 4.0 177 1.7 174 - MR. AWE, DRAW COMPLETE GRAPH 1993 1994 1995 1996 1997 1998 Years Figure 5: Number of Listed Companies Nigerian Journal of Banking and Financial Issues 99 Table 7 shows that there were no significant changes in the number of companies listed on the Nigerian Stock Exchange for the period under review both "Pre and Post" automation. Table 8 Number of Listed Securities Year 1998 1997 1996 1995 1994 1993 Govt. Stocks % Change 19 22 24 28 35 37 -49 -41 -35 -24 -5 - Industrial Loans 59 60 69 67 64 71 % Change -17 -16 -3 -6 -10 - Equities % Change 186 7 182 5 I53 5 181 4 177 2 174 - Whilst the number of government stocks and industrial loans decreased progressively over the years, largely due to maturity, redemption and eventual de-listing, the number of equities (ordinary shares) increased progressively due lo new listing of securities. Results obtained from the analysis of data for this study show that the introduction of automation in the Nigeria Stock Market acted as a catalyst to both the volume of trade consumated on the floors of the exchange from 473 million shares in 1993 to 2.1 billion shares in 1998. It also shows an increase in the number of stockbroking firms from 140 in 1993 to 226 in 1998. Conclusion The introduction of the CSCS and the ATS have increased the tempo of trading activities on the Nigerian Stock Market. They have increased substantially the following indices: market turnover, transparency: investor's confidence: foreign investments: liquidity and vibrancy of the market: and prompt inter-broker money and stock settlement.. In concluding, this study wants to make the following recommendations so that the Nigerian Stock Market can enjoy fully the dividends of automation. These include the following: i) The CSCS and the ATS should accommodate all quoted securities. For now only equities are traded through the CSCS and ATS: other securities such as government stocks, industrial loans, bonds and preference stocks are yet to be accommodated in the current automation process, ii) The transaction cycle currently T + 5 for settlement of cash and stock should be reduced further to T + 1 through the use of a single settlement Automation and the Nigerian Stock Exchange 100 bank as opposed to several settlement banks being used now. iii) The trading hours should be extended beyond the present closing time of 1.30p.m. iv) Remote trading where stock brokers would be able to trade from the conveniences of their offices should commence soonest, this would involve in the introduction of computer networking, v) Licensing of stock broking firms should be liberalised, vi) There should be a separation of functions between jobbers and dealers and finally the Federal Government of Nigeria should float new development stocks for capital projects instead of other forms of borrowing. These recommendations, it is hoped, would further improve on the automation process already commenced thereby enhancing the capital mobilising capabilities of the Nigerian Stock Exchange. Reference: Adetunji. W. (199X). "The Nigerian Capital Market. The Task Before Market Operators." A paper presented at the 2nd Annual Conference of the Chartered Institute of Stock Brokers. Lagos Nigeria. -(1997): Foreign Investment Opportunities. Potentials and Rimers in Capital Markets- A Paper Presented at the Alriean Conference of Stock Brokers: Registrars. Investment Bankers and Fund Managers. Lagos. Nigeria. Alile. H.I. (1997): -Financing Public Project through the Capital Market." A Paper Presented at the International Conference on Promoting Capital. Market in Africa Lagos Nigeria -(1992): Establishing a Stock Market: The Nigerian Experience. A paper presented at the International Conference on Promoting Capital Markets in Lagos Nigeria Nigerian Stock exchange (1999): Fact book. Nigerian Stock exchange (1999): Daily Official List. Olowe. R.A (1998) Effective Pricing of Securities in the Secondary Market." Chartered Institute of Stockbrokers. Lagos - Nigeria. Wall Street Trade Co. Ltd. (1999): Custom Street Review: A Newsletter. Vol. I, Issue 2. Ying. C.C. (199f,): "Stock Market Prices and the Volume of Sales." Economic Africa, "volume 34.