In a bid to woo retail investors back to the stock market, dealing member firms of the Nigerian Stock Exchange (NSE) have been introducing remote trading facilities, writes, EromoseleAbiodun

In an apparent move to take the local bourse to the next level, the Nigerian Stock Exchange (NSE), had in 2005, introduced remote trading or Electronic Communications Networks (ECN), a system that enabled brokers to trade in the comfort of their offices without having to come to its trading floor in Marina.

In spite of the benefits of remote trading, many stockbroking firms failed to embrace the system and preferred to come to the NSE trading floor in Lagos.

While the attitude of a few elicited the Exchange’s call for change of behaviour, some stockbrokers described remote trading as one of the commendable innovations of the Exchange.

For instance, Mr. Akeem Oyewole of Stanbic IBTC Stockbrokers, told THISDAY that remote trading had helped to improve the performance of his company.

He said “We have 10 stockbrokers in our company and it is only one of them who, goes to the exchange’s trading floor to trade physically. The remaining nine trade remotely from our office,” he said.

Efforts by others
Before Security Africa introduced Real Trade, other companies had introduced similar remote trading platforms. They include: Capital Bancorp Plc, Meristem Securities Limited, Lead Capital Plc, Morgan Capital Group and Investment One.

Speaking on its remote trading platform for instance, Managing Director of the company, Mr. Aigbogie Higo, stressed that the market needs to revive the interest of local investors in the stock market, hence the need for a platform that will enable them trade with as low as N1000.

He said the Bancorop e-Trade platform was an inventive retail stockbroking online service offering, carefully crafted to provide access to stockbroking services for the busy executives and upwardly mobile young adults.

Bancorop e-Trade, he added, is also a platform to encourage financial inclusion for the investing public through user friendly and simple online interface.
According to him, “It is about the ease of stockbroking transactions from the comfort of homes or offices as you are only a click away via your handheld, portable tablet or the good old computer system. The platform gives ease of access, which means that investors will have 24/7 access to their portfolio position and cash statement.”

On the benefits of the platform for investors, he said it will help to reduce the cost of doing business for investors in the capital market adding that travelling and opportunity costs will also reduce.

According to him, “It will also give convenience i.e. investors don’t need to visit our office to do transactions. There is increased transparency because investors can see what is happening in the market real time. Our affordable start-up plan enables investors to start trading with as low as N1000.

“Through the Bancorop e-Trade, investors will have access to the latest market data to enable accurate order instruction and avoid errors and lack of clarity of orders or signature forgery and theft of investors’ shares.”

The platform, he added, provides an opportunity for investors to monitor the implementation and follow-up investment dealings at any time.
Capital Bancorp, he stressed, is one of the foremost financial and professional services providers in Nigeria.

According to him, Bancorp e-Trade is designed as a convenient and transparent means to ensure investors are in control of their investments at any time.
To be eligible to trade on the portal, one needs only access to internet, a functioning e-mail address, any active bank account, a fair understanding of the workings of the stock market and a stockbroking account with Capital Bancorp.

He outlined that his firm has simplified the account opening process for new investors as they only need to fill account opening form and upload scanned passport photo, scanned utility bill that is not later than three months, scanned specimen signature, scanned mode of identification and their bank details.

The features of Bancorp e-Trade, which sits on the infoware e-business suite platform, included display of balance in any currency of choice, online mandate, ability to specify expiry dates on orders, display of portfolio balance and portfolio analysis, statement of account, ability to view and download contract note in different formats, ability to view certificates and verification status, live streaming of stock market prices, live portfolio valuation, amendments or cancellation to undone transactions, graphs and charts and online real-time client information.

Guidelines on Online Trading
Following the growing number of retail online stockbroking portals that allow investors to execute their own orders on the NSE, the Securities and Exchange Commission (SEC) has designed guidelines for effective regulation retail online stockbroking portals.

Informed source at the SEC told THISDAY recently that the SEC has put together a team to review the retail online stockbroking portals and develop a robust regulatory framework that could aid the growth of the segment and protect the investors and the market from abuses.

The regulatory framework, THISDAY learnt, is expected to provide clear rules and guidelines for stockbroking firms and users of the online trading portals.
At the moment, there are no specific rules and guidelines for the online trading portals, which have emerged with the launching of the NSE’s new multi-faceted trading engine in 2013.

The regulatory framework, according to sources, would seek to protect the market and investors from the main risk of identity theft while allowing enough flexibility that could stimulate the growth of the online trading.

NSE’s new trading engine, X-GEN, became fully operational in 2013. A dynamic platform that has numerous opportunities and capabilities, it is able to process some 100 million orders per day with 5,000 trades per second. It has a highly flexible and configurable market structure that can be enhanced to support the auctioning process and trading of several asset classes including Treasury Bills, a wide range of Fixed Income securities (including FGN Bonds), Equities, Exchange Traded Funds, Commodities and Derivatives.

Based on NASDAQ OMX’s proven X-Stream technology, the X-Gen allows investors, through their stockbrokers, to have real-time access to market prices and their portfolios and provide them with ability to execute market orders in near real-time on a wide range of devices including smart phones and laptops from any location.

History of Remote Trading
In 1997, a stockbroker, Jerry Putnam, spotted an obscure business opportunity in the stock market that a lot of his colleagues had missed. The United States Securities & Exchange Commission had issued new rules to require market makers who hold inventories of certain stocks to ensure that there is always a ready market for them to publicly display their best prices for each issue.

The SEC was particularly concerned that NASDAQ market makers were offering better quotes via private trading systems or ECN, which cater mainly to institutional investors, than they were to the general public. Amid sweeping changes in trading technology and the booming market, Putnam saw a new business opportunity for remote trading and a chance for newcomers to get into the market. The SEC had said market makers could fulfil their disclosure obligations if the ECNs made their best quotes publicly available on NASDAQ. But the rule change also paved the way for the ECNs to make all the prices they carried-some of which were better than those listed on NASDAQ-visible to the public, making the ECNs attractive alternatives for investors. Putnam, who ran an electronic brokerage at the time, decided to start a lower cost ECN aimed at a broad range of investors.

Within a few months, Putnam launched Archipelago Holdings Incorporated in Chicago to compete in that market. Two years later, Archipelago had annual revenues of $20 million. It turned a profit in its first six months and has drawn significant investment from Goldman Sachs and ETrade Group, the largest online broker.

However, one of the key developments in the history of ECNs was the NASDAQ over-the-counter quotation system, created by the National Association of Securities Dealers in February 1971 based on information provided by Joe McCulley to Sperry-Rand in 1968 concerning the structure of an electronic marketplace.
The 1964 Securities and Exchange Commission investigation into the opacity of the over the counter markets provided the impetus for creating the NASDAQ. NASDAQ was created following a 1969 American Stock Exchange study estimated that errors in hand-written securities order processing cost brokerage firms approximately $100 million per year.

The NASDAQ system automated such order processing and provided brokers with the latest competitive price quotes via a computer terminal. Later, more advanced ECNs would develop from regulatory changes that developed out of the 1994 U.S. SEC act.

Understanding ECN
ECN is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on electronic networks are stocks, bonds and other money market instruments. ECNs increase competition among trading firms by lowering transaction costs, giving clients full access to their order books, and offering order matching outside of traditional exchange hours. Electronic communication networks are sometimes also referred to as alternative trading system.

It can also be described as a private trading system open to subscribers that eliminates the human intermediaries involved in a typical stock transaction.
In a traditional market such as the NSE, customers place an order to buy or sell a stock with a broker, who calls in the order to his company’s floor broker at the exchange. On the system, buyers and sellers post their orders via their computer, which automatically matches them. The ECNs earn a fee from each trade.

How Remote Trading Works
Experts who spoke to THISDAY said trading via electronic communication network is as easy as making orders for buy and sell in the usual trading pattern.
Stock market analysts and chartered stock broker, Mr. Arinze Nzobu, explained that to trade via remote trading platform, one must be a subscriber or have an account with a broker that provides direct access trading.

According to him, “Online trading subscribers can enter orders into the platform via a custom computer terminal or network protocols. The system will then match contra-side orders (i.e. a sell-order is “contra-side” to a buy-order with the same price and share count) for execution. The machine will post unmatched orders on the system for other subscribers to view. Generally, the buyer and seller are anonymous, with the trade execution reports listing the platform as the party.
“Some electronic networks may offer additional features to subscribers such as negotiation, reserve size, and pegging, and may have access to the entire ECN book (as opposed to the “top of the book”) that contains important real-time market data regarding depth of trading interest.”

The emergence electronic communications networks, he added, made it possible for more brokers to trade after-hours.
Nzobu stressed that in theory, any investor who makes arrangements to access an electronic communications networks can trade in the after-hours marketplace.

“To participate in the after-hours trading sessions, you must be a customer of a brokerage firm that either has a remote trading platform of its own or access to one or more electronic communications networks. It is important to understand that electronic communications networks are highly regulated. For equities, ECN exist as a class of SEC-permitted alternative trading systems. As an ATS, remote trading platforms exclude broker-dealers’ internal crossing networks – i.e, systems that match orders in private using prices from a public exchange,” he said.

ECN Fee Structure
Nzobu stated that remote trading fee structure can be grouped in two basic structures, “a classic structure and a credit (or rebate) structure.”
According to him “Both fee structures offer advantages of their own. The classic structure tends to attract liquidity removers while the credit structure appeals to liquidity providers. However since both removers and providers of liquidity are necessary to create a market, providers must choose their fee structures carefully.”
In a credit structure, he said ECNs make a profit from paying liquidity providers a credit while charging a debit to liquidity removers.

“Credits range from two kobo to 29 kobo per share for liquidity providers, and debits from 25 kobo to three kobo per share for liquidity removers. The fee can be determined by monthly volume provided and removed, or by a fixed structure, depending on the platform. In a classic structure, a platform may charge a small fee to all market participants using their network, both liquidity providers and removers. They also can attract volume to their networks by giving lower prices to large liquidity providers. Fees for ECNs that operate under a classic structure range from 0 to 15 kobo, or even higher depending on each platform,”he said.

ECN vs Currency Market
Nzobu disclosed that the first ECN for internet currency trading was New-York based Matchbook FX formed in 1999.
He added that back then, all the prices were created & supplied by Matchbook FX’s traders/users, including banks, within its ECN network.

This, he stated, was quite unique at the time, as it empowered buy-side FX market participants, historically always “price takers”, to finally be price makers as well.
“Today, financial services houses with currency dealing provide access to an electronic trading network, supplied with streaming quotes from the top tier banks in the world. Their matching engines perform limit checks and match orders, usually in less than 100 milliseconds per order. The matching is quote driven and these are the prices that match against all orders. Spreads are discretionary but in general multibank competition creates 1-2 pip spread, “he stated.

The order book, he explained, is not a routing system that sends orders to individual market makers.

“It is a live exchange type book working against the best bid/offer of all quotes. By trading through an ECN, a currency trader generally benefits from greater price transparency, faster processing, increased liquidity and more availability in the marketplace,” he explained.

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