The Real Problem
The inability of the majority of the investors in the market to take advantage of the information as they come, thereby, to some extent, minimizing or tempering the volume of profits that would go to the few with supposedly sharper entrepreneurial acumen, is one major reason why it appears that the market (in majority) does not react to information availability. Many operators in the Nigerian market lack functioning research departments, which in the least is a structured formal platform for information acquisition, intelligence and information processing for advantageous speculations. Some even lack very market wise brokers such that they are like sheep and follow the bandwagon. In every market, bandwagoners are usually the worst hit. The smarter ones would have netted their profits and moved on leaving the left-overs to be scrambled over by those who are not smart enough to discover the opportunity. What this means is that in order to step-up the number of responses to opportunities in the market, majority of the people in the market should be able to identify these opportunities almost about the same time such that the moves to grab the opportunity may likely yield uniform market outcome. This only happens if all other things are impossibly equal. Because even when majority of the operators discover opportunities the speed to take advantage may not be the same. The capacity to take advantage may also not be the same and so on.



Herd effect, which follows from the inability of majority of the operators to discover and take advantage of market opportunities as they are revealed, is in turn characterized by substantial information transmission lag. Minimizing this lag can also help in heightening overall responsiveness of the market if such large scale response is considered desirable. My thinking is that it is not based on entrepreneurial reason but is rather premised on some sense of welfarism which of course is withdrawn from market principles of rivalry. That is to say ‘let all of us have the information at the same time so that no one beats the other’. This hurts as well as undercut the smart ones. The often cited developed market experience is largely a function of the majority being able to carry out success intelligence almost at equal level; be able to correctly predict the market almost with same level of competence. This information processing capacity-gap in the Nigerian market is very huge. Almost over 60% of market players do not have functioning research units. Even majority of those have merely produce reports and not conduct any meaningful market intelligence.

The overall and uniform responsiveness of the market to such fundamental, environmental or external influences are not necessarily a desirable goal, particularly if it is deliberately pursued and imposed on the market by regulatory authorities. Market is characterized by competition and players should be allowed to compete with every legally acceptable deftness in their possession. The information transmission lag occurs primarily because of the factors already mentioned namely the inability of many firms to discover opportunities on their own; the less than equal capacity of the operators to equally take advantage of these opportunities as they fall due. One of the things that the Nigerian Stock Exchange and the Securities and Exchange Commission can do in this regard is to enhance the mechanical efficiency around information provision by firms and on instruments traded on the exchange. One way is to define higher and more detailed levels of information requirements that are also time-bound and force them to comply with it. It is not the duty of regulating authorities to enforce the market use of information and so how the provided information is utilized by the firms operating in the market is really up to them.


For many years, stockbrokers stuck to virtually same way of doing exactly same thing. The result was that those who were able to do same thing differently and satisfactorily made more impact and were able to reap entrepreneurial profits before others join. The resistance to change which had plagued the market for many years is also in part why the kind of market-wide movement of prices in response to changes has been largely difficult and unobservable. Innovativeness generally takes place when there is curiosity to alter the status quo for the better which in this case can mean better customer satisfaction and attendant enhanced wealth. It is largely accomplished through research, intelligence and experience. But with a predominantly research/information unconscious market it is difficult to expect the speed of innovativeness that can bring about timely response of greater proportion of the market to changes in the environment. More than all the points already mentioned, is the possibility of regulator obstruction to information transmission.



Although the Nigerian capital market is regulator driven, there is still evidence of regulator obstruction to its processes. Various forms of entry restrictions by the market regulators pose to some extent as obstruction to a well functioning market. The NSE should reduce the limitations imposed on entry of new members into the market except on legal grounds in which character of the directors are involved. This is because the directors will have charge for the investments of people. More firms should be allowed to participate in the market. More products should be allowed. It is encouraging that more firms are getting quoted. This generally calls to question the rationale behind the new minimum capitalization requirement. For fee based operators this can only be another way of restricting entry into the market and is largely considered an obstruction to a broadly constituted and well functioning market. Minimal restrictions can only engender more vibrant market. Stockbrokers are not deposit takers even though one can argue that clients’ assets are entrusted in their care. But unlike banks that are constitutionally deposit taking institutions, the way that the brokers are supposed to use these assets are known ab initio. Risks are run largely when a broker acts outside the ambits of the law such as using clients’ funds which was meant for share purchase to engage in other business ventures with the hope of making supernormal profits and restoring what is due to the investor. If the reason for the proposed minimum capitalization is to deepen the market through the enhancement of the proprietary trading capacities of the market, the answer to that is that the regulatory authorities have no business with the scale of business or trading which each stock broking firm will like to operate at.



The choice should be theirs. If on the other hand the idea is to protect investor funds, broking firms that want to reassure their clients of their ability and credibility in protecting their assets can buy insurance policies covering the assets of its clients in their possession. This can even be a better and more acceptable client asset protection than the compulsory minimum capitalization requirement. As far as I believe, the imposition of a minimum capitalization of N1 billion as well as the imposition of licensure requirements of possession of the Associate membership of the Chartered Institute of Stockbrokers are regulator obstructions which may actually impede robustness of the market. The ACIS argument may be considered weak in view of the large number of stockbrokers that are being turned out relative to the number of exchanges, but generally it imposes some restriction. The company or an investor can chose who trades for him once full disclosure concerning the person is made. What has also emerged form the arguments above is that a free, robust and well functioning market is indispensable for achieving robust responses and may successfully temper the degree of entrepreneurial profits that are due to a small group of participants who are much smarter. This is only a possibility and not a guaranteed certainty. A free market is in turn characterized by free entry and exit. The regulator obstruction discussed above indicates that there are still significant levels of market obstruction. Aside that, more products should be encouraged to be registered within the market.



Breaking the Carmel ’s Back

The Nigerian stock market cannot efficiently reflect fundamental values because no market possibly can and yet satisfy the entrepreneurial quest for profit. The market discovery process, entrepreneurship and competition make it inevitable that only those participants in the market who can successfully latch on the inefficiencies of market coordination presented as information can consistently make good returns. Given that scenario, the pursuit of efficient market in that sense is a ruse and an attempt to benchmark the Nigerian market against such non-existent standard is just a ruse. Efficiencies are attained individually by investors who use what means available to them in terms of funds, research skills and other complements to consistently outsmart the market. Such efficiency is impossible at the level of the market because it cannot be measured interpersonally. The options open therefore is for majority of the investor/traders/practitioners to understand the competitive strategy of the market leaders and find ways of beating them to it. Some of the strategies which have worked for the leaders in this market are the possession of sharp eyes and ears for information through variety of ways which includes the set up of formal research and intelligence platforms. The other includes the financial power to enable the immediate conversion of opportunities without much pressure. A necessary condition is to have good intelligence on the market but the satisfying condition is to have what it takes to take full advantage of such perceived opportunities.



Now when many participants have these advantages in almost a relatively equal or at beyond-minimum-benchmark levels, it will become relatively more difficult for a few participants to beat others and orchestrate un-noticed movements in the market place. However when many have these strategic advantages at relatively equal levels, changes can occur much more widely and almost in unison within the market. This unison does not represent an efficient market uniformity which will net out and result in no profits for each but rather, represents a broadened or robust rivalry resulting in reduced information transmission lags. Heavy information transmission lag which characterizes the Nigerian market makes it much more possible for a few smart market entrepreneurs to continue to feed fat using market information for a fairly long time before the rest of the market wakes up to that realization. This in itself is good and desirable as it demonstrates entrepreneurial acumen of those few. However, competition can be heightened to generate more benefits to everybody. When this is done, the immediate effect will be reduced lag in market information transmission period. But this lag can best be reduced when majority of the operators have mechanically efficient information and intelligence processing infrastructure. This is exactly what makes the difference between markets in developed and developing countries.


Name % Change
Okomu Oil Plc 52.32%
Cadbury Nigeria Plc 46.30%
NAHCo Plc 40.00%
Nestle Nigeria Plc 62.30%
Int. Breweries Plc 42.68%
Chevron Oil Nig. Plc 60.00%
Ashaka Cement Plc 50.16%
Guinness Nigeria Plc 53.80%
7UP Nigeria Plc 72.24%
Nigeria Breweries Plc 54.10%
John Holt Plc 51.50%
CCNN Plc 51.41%
SCOA Plc 68.00%
NCR Plc 60.00%
Mobil Oil Nig Plc 60.00%
A.G. Leventis Plc 88.45%
NBC Plc 56.21%
WAPCo Plc 60.00%
Chellarams Plc 40.00%
BOC Gases Plc 60.00%
Continental Re Plc 70.00%



Bibliography

Securities and Exchange Commission (2004) “Report of the Study on Share Ownership Pattern of Quoted Companies in Nigeria (2002 – 2004)” http://www.databank.sec.gov.ng/shareownershippattern.htm Browsed on April 30, 2008


Martin Oluba, PhD, DBA is an adjunct Professor of economics at the Swiss Management Center, Switzerland and Vienna and also an Executive Director in Forte Financial Limited, Lagos Nigeria . Send him your comments at martin@martinoluba.com or visit his website www.martinoluba.com for his views on other subjects of national concern.

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