Market Makers: Q & A with Greenwich Trust Ltd

Proshare

 - Appointment for Market stability

 

“The Greenwich Trust Group made up of Greenwich Trust Limited, Greenwich Securities Limited, Greenwich Asset Management Limited, Greenwich Nominees Limited and GTL Properties Limited. The Greenwich Trust Group provides Issuing House, Market Making and Investment Advisory Services through Greenwich Trust Limited (duly registered with the Securities & Exchange Commission “SEC”), Securities Dealing Services through Greenwich Securities Limited (a Member of the Nigerian Stock Exchange “NSE”), Funds/Portfolio Management through Greenwich Asset Management Limited (duly registered with the “SEC”), Nominees Services through Greenwich Nominees Limited and Real Estate Investment through GTL Properties Limited. The members of the Greenwich Trust Group are private companies fully owned by Nigerian Individuals. In addition to their resourceful Boards, the affairs of each member of the Greenwich Trust Group is operated by a skilled and seasoned Management team made up of individuals with deep knowledge of the Nigerian Capital/Money Markets and the foreign financial environment. The operations of the Greenwich Trust Group are ably supported by operational divisions/departments headed by a management executive” (Source: Greenwich Trust Group Limited website)

 

Proshare NI sought to find out more about the appointment of Greenwich Trust Limited (Greenwich) as a Market Maker in the Nigerian Capital Market and what the appointment means to the company.

 

In this interview with PETER OBIORA of Proshare NI, Kayode Falowo, Chief Executive Officer (CEO) of the company discusses on issues relating to how a Market Maker thinks, how the role of Greenwich as a Market Maker can benefit the investment community.

 

Others are issues discussed include the  number of Market Makers required for the idea to be successful, relationship between the Market Maker and Regulators, the N2.0 billion Capital Base for firms operating as Market Makers, expected licensing of Greenwich from the Nigerian Stock Exchange (NSE) and the issue of share-buy-back and intervention funds. Excerpts:

 

 

What does the appointment as a Market Maker mean to you?

 

What it does is that it creates a new line of business; the Greenwich Group is an Investment Banking Group that deals in the business of Asset Management, Securities Dealing, Financial Advisory Services and Provision of Issuing House Services.

 

The Market Making registration has provided for us a new line of business; which is new in Nigeria and we are glad that we have been considered as one of the three houses that has been registered to carryout this role in Nigeria today.

 

This also helps Greenwich to contribute its own quota in the development of the Nigerian Capital Market (NCM). Right now, the Market is experiencing a downturn at this particular point in time. And we feel strongly that our appointment would help to ensure a stabilisation of the Market.

 

This would make the NCM enjoy the confidence of investors that it has enjoyed in the past couple of years.

 

EDITORS NOTE:  The Securities and Exchange Commission (SEC) some few weeks back confirmed that it has approved the applications of Greenwich Trust Limited, Chapel Hill Advisory Limited and Diamond Capital & Financial Market Limited as Market Makers.

These Market Makers are to ensure that there is liquidity in the Nation’s Stock Market at any point in time through buying of shares when there is a glut or selling same during scarcity.

It was decided August 2008 by Regulators in our Capital Market to appoint them in order to check the rate of fallen share prices in the Market.

 

 

How does a Market Maker think and what makes this task such a must at this time?

 

It is not that a Market Maker is required only at this point in time. The Market Making process ordinarily should be part of any Securities Market; any Market that trades, both the Capital Market in terms of shares, Foreign Exchange (FOREX) and Fixed Income Securities trading.

 

In the advanced Market, the Market Making mechanism has been in place all these years, it is just simply been introduced in Nigeria at this point in time, because we are also trying to align our Market with international best practices.

 

Also, it is coincidental that it has come at a time when our Market is experiencing recurring downturn. I affirm that if we didn’t have a downturn, the Market Making process is the one that is overdue in the NCM.

 

In terms of the thinking pattern, what the Market Maker does, is that it stands as the Buyer or Seller of last resort, they are their to ensure that liquidity is provided to the Market and very up-to-date, accurate and in-depth research information on the companies in the Market are available for those who would like to take investment decisions in the Market.

 

The Market Maker also ensure that at every point in time, people who wish to buy or sell securities, have the supply of these securities and are able to sell to the Market at any point in time.

 

Therefore, in essence, the Market Maker is there to provide liquidity, stability and prevent wide volatility on the price movement of stocks in the Market.

 

However, all these things guide the thinking pattern of any company that does Market Making and essentially, those are the roles they are meant to play and I believe that is what would guide the thinking pattern of a Market Making firm.

 

How can the role of Greenwich as a Market Maker benefit the investment community following investors’ low confidence in the Market?

 

First and foremost, it provides confidence, an investor in a stock, who knows that at any point in time, he or she wishes to sell that stock, there would always be a Market Maker in that particular stock.

 

Remember a Market Maker is not for the entire Market, it is for specified Securities. In as much as people know that there is a Market Maker for that specified Securities and they are able to enter it and know full well that at any point in time they want to sell, somebody is there; even in a Market such that we are experiencing now.

 

This would provide them Securities and give them confidence to ensure that they can go in and come out of a particular Security any time they chooses.

 

The other thing that it does is to ensure that the wide movement in prices are moderated.

 

For instance some few years ago, stock prices moved from N7.00 to N30.00; even when the fundamentals of these companies does not justify such movements, a Market Making mechanism would not have allowed that to happen; because the Market Maker would have posted prices that would ensure that the prices of the stock are within a specified range which would be reflective of the true worth of the particular Security in question.

 

This is possible; due to the fact that the Market Maker must have done a lot of analysis, has more knowledge about the company and able to better price the Security than the rest of the Market.

 

 

Does this represent the edge needed to trade in the vicious turn in the Market?

 

Once the Market Mechanism start, like I affirmed earlier, it would first and foremost bring confidence.

 

Again, people would know they can go in and come out of a stock as at when they want.

 

Like the situation we have now; that everybody is trying to dump regardless of what the pricing fundamentals of such stocks are, would no longer exist.

 

I believe this process would bring stability in our Nation’s Capital Market and calm a lot of nerves; because people know that if they don’t sell today, they would have somebody that would buy from them in a few days to come.

 

It will also actually create a more efficient trading pattern in the Market and ensure there is a better pricing mechanism for all stocks in the Capital Market. Thus, I think it is going to be better for trading both on the side of operators and investors.

 

Investors’ large order and number of Market Makers, What is the minimum in Nigeria?

 

In terms of order quantity, the Securities and Exchange Commission (SEC) has specified a minimum of 100, 000 units of any Securities to which you are making market on.

 

Also, the rule specified that you can enjoy a spread of 43 percent; to that extent, it gives you an idea of your bid and ask prices.

 

However, the Market Maker is able to determine its pricing mechanism based on that regime that has been provided by SEC and in terms of quantum, it can do up to a 100,000.

 

But I must also say, the Council of the Nigerian Stock Exchange (NSE) is about to release its own rules and once this is done, it will give us an insight into the operation as required by the NSE.

 

Do we need more Market Makers?

 

When you consider the fact that rules as envisaged would also limit the number of stocks in which a Market Maker can make a Market, I would confirm that it is a reasonable rule. The Market Maker is making markets for about 200 stocks that are listed on the Floors of the NSE.

 

This would not send the right message, because we know that it would be impracticable. To that extent, it is my humble view that the regulators would still register more Market Makers in future in order to be able to ensure that we have are widely spread as possible, so that a large number of stocks have companies that are making market on them; otherwise if that does not happen; then we have too few stocks that market is been made on.

 

Reporting line for Market Makers and Regulators

 

Just like it is with the business of Stockbroking, the Market Maker would be registered by SEC as a Market Operator and SEC is of course the primary Regulator of the Market.

 

However, beyond this is that the Market Maker would conduct its business on the Floor of the NSE and using the infrastructure of the Stock Exchange, therefore, the Market Maker must also be licensed to operate as such by the Council of the NSE.

 

The Market Maker just like the Stockbroker would be required to have two masters; the NSE and SEC.

 

Adequacy of N2.0 billion Capital Base for Market Makers

 

I think that N2.0 billion is adequate as a Capital Base for Market Makers. The Market Making business is not to be done from a firm’s Share Capital; it is expected to be done using lines that would offer you a wide coverage of Securities. This is a combination of your Capital Base and lines for business of Market Making; of course your Capital Base would determine the availability of such lines to any company that is a Market Maker.

 

On Share- buy- Back and intervention funds

 

The rules for share-buy-back has been passed by SEC, it is operational for any company that wishes to buy back its shares to come back to the Market and do so.

 

Just like the rule for Market Making has been passed, I am sure in few weeks to come the Market Makers would start operating from the NSE.

 

Those two are quite operational, so taking advantage of the platform that has now been provided by Regulatory Authorities, the Federal Government (FG), Stock Exchange and SEC are not going to force a company to buy back its own shares, but the enabling environment has been provided, the rules have been passed, approvals have been sought, special dispensation was actually utilised to get the approval in order to address the issues in the Market.

 

Therefore, all companies that are quoted on the Market are now free to buy back their own shares; subject to the following rules given by the Commission.

 

In terms of the Intervention Funds, there have been a lot of pros and cons relating to it and I believe that those discussions are still ongoing. But I can confirm that a more enduring approach would be what the Regulators have put in place.

 

 

Licensing of Greenwich as Market Makers by the NSE

 

The Council of the NSE is in the process of doing that and working on the rules for Market Making and once they are made public, firms would be licensed to carryout their business as a Market Makers.

 

 

End

 

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