Low liquidity, market instability undermine derivatives trading kickoff

Nigerian Stock Exchange

The inaction surrounding the commencement of derivatives trading has been attributed to low liquidity and assessed instability bedevilling the nation’s stock market.

An Exchange Traded Derivative (ETD) is merely a contract that derives its value from an underlying asset that is listed on a trading exchange and guaranteed against default through a clearinghouse.

A member of the Chartered Institute of Stockbrokers’ Conference Committee, Akeem Oyewale, said despite efforts by the regulators to roll out trading in derivatives, there is still lethargic action by the market players due to market instability and low liquidity.

“Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) have tried to introduce this to the market.

There is still that lethargic action by the market players. There is a bit of resistance from the market to actually absorb this.

Until there is so much liquidity in the system, we are not going to see a desired growth in derivatives as it has been in other developed markets.”

The Relationship Officer of Foresight Securities Limited, Charles Fakrogba, said: “The legal framework for the establishment of the Central Counter Party (CCP) has not been completed. This CCP is critical for the take off of the derivative market.”

The Managing Director of United Capital Securities, Jude Chiemeka, said in terms of product development, derivatives would help enhance the array of services that the brokerage communities are currently enjoying.

He said: “Derivatives is derived from other things that exist in the economy. First of all, in terms of product development, it would help enhance the array of services that the brokerage communities are currently enjoying.

“It would help the brokers to improve their revenue stream and improve their expertise so we are now able to meet more need along what is going on because the key word now is digital technology.

With derivatives, brokers are able to do structured products that they can sell inform of derivatives. Derivatives market is huge internationally”.

There have been arguments, though, to the effect that the NSE’s product offering has only reflected the domestic economy’s financing needs.

Finance experts are of the opinion that opportunities should now abound for a broadening of the Exchange’s product offerings to include key derivative categories, expansion of listed mutual funds, index funds, among others.

In a bid to strengthen the NSE and make it compete favourably with other Exchanges across the globe, some experts had at various fora called on regulators to create more products that would broaden deepen and injection of liquidity into the market.

Due to the recent catastrophic fall of capital market, rapidly declining Foreign Direct Investment (FDI) and scarcity of investment opportunities, investors in the nation’s capital market are seeking an innovative and versatile financial product such as derivative securities for hedging and market expansion.

Globally, the derivatives market has attained the highest growth of all financial market segments in recent years and has become the central contributor to the stability of the financial world.

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