Finance

Is the new Derivatives market the game changer?


In 2020, when the pandemic took a toll on the global economy causing worldwide lockdowns and shutting businesses. Day traders and speculators took advantage of this by shorting or holding sell positions on stock futures. Nigerian stock market speculators just “sold their investment” while not gaining value.

In a derivative market, companies like SAHCO, a ground handling agitation company would have been shorted as transaction volumes of the company would have taken a downturn. However, there was no derivative market that would enable speculators to gain value by foreseeing a downturn in businesses.

Similarly, when SAHCO announced a deal to handle British Airways ground handling services, market speculators would have opened long future positions without holding the stock to gain profit from the deal. But what was witnessed was a marginal increase (less than 1%) in the underlying stock – throwing question marks on the efficiency of the market.

Holders of the stock were expecting the share price of SAHCO to spike similar to how shares in the NYSE rise after a major deal of a blue-chip company has been announced. But that was not the case for SAHCO share price on the Nigerian Exchange. Day traders will observe that stock price movements in the Nigerian stock market do not move at the same velocity or wave as US stocks. Liquidity is often cited for these sterile moves. Some analysts will also say there are few market participants in the Nigerian stock exchange.

At the end of trading on the 22nd of April, the Nigerian Exchange (NGX), a total of 342,139,687 shares in 4,976 deals. Trading approximately 5,217,590,805 as at April 21, 2022. -the New York Stock Exchange (NYSE) is the leading stock exchange in the world. Clear difference why the market moves in a different fashion.

The introduction of the derivative markets in the Nigerian stock exchange will give new speculators more tools to make profits in the markets. The Nigerian Exchange Limited (NGX) has lined up seven derivative contracts for the first phase, all of which have gained the consent of the industry watchdog, the Securities and Exchange Commission.

Derivatives are also traded by speculators with the sole purpose of making profits on short-term price movements. Before the introduction of derivatives, there was less than 30 percent of listed equities were actively traded while the Nigerian Exchange Limited (NGX) offers only basic products, and this raised concerns about the capital market’s shallowness and lack of breadth.

But what difference will it make with the addition of these new contracts – the approved contracts being Access Bank Plc Stock Futures, Dangote Cement Plc Stock Futures, Guaranty Trust Bank Plc Stock Futures, MTN Nigeria Communications Plc Stock Futures, Zenith Bank Plc Stock Futures, NGX 30 Index Futures, and NGX Pension Index Futures.

Would more contracts be introduced to drive in more market participants? Will this give Nigerian speculators and investors more options to gain profit? With trading volumes lower than pre-pandemic levels, how is the Nigerian stock exchange planning to bring more participants to the market?

How do we bridge the gap between other countries’ exchanges? Johannesburg Stock Exchange market capitalization is in excess of one trillion dollars while the Nigerian Stock Exchange value is just about fifty billion dollars. Could the introduction of ETDs be the equalizer? The JSE is more liquid, despite Nigeria’s GDP surpassing South Africa’s GDP. How can the NGX fix this anomaly?

For instance, in the United Kingdom, pension funds have in the past years increased their use of derivatives, an idea that could be emulated by Nigeria. The overall derivatives market is vast and estimated at more than $1.2 quadrillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world gross domestic product (GDP).

Nigeria’s ETDs will boost the nation’s stock market just as it did with South Africa – Africa’s first derivative market. South Africa’s derivatives market has grown rapidly in recent years, which has supported capital inflows and helped market participants to price, unbundle and transfer risk.

South Africa has had to manage the risks associated with the misuse of complex financial products via continuous improvement and enhanced enterprise risk frameworks. Accordingly, innovation drives interest in any product.

The Nigeria Exchange should make its market more robust by enhancing market infrastructure, regulatory practices, and quality of instruments traded on the floor of the exchanges as such efforts could encourage more market participants.



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