Creating an Innovative Trading Environment with FIX
Olumide Lala of THE Nigerian STOCK EXCHANGE shares their plan to upgrade their trading system and adopt FIX for trading.
Nothing has a greater impact on the future of organizations than the ability to harness technology. As a result of the increase in the application of technology to market processes, there is today a shift from trading floors to screenbased systems. Electronic trading platforms are increasingly in direct competition with traditional exchanges, amongst other associated developments. Electronic trading, long established and used by the leading stock exchanges, is now the norm across much of the developing world. Although the leading African exchanges, notably the Johannesburg Stock Exchange (JSE, South Africa), Cairo-Alexandria (Egypt), Casablanca (Morocco) and THE Nigerian STOCK EXCHANGE (NSE, Lagos), made the switch over ten years ago, the rest of Africa has been slow to catch up.
Increased Electronic Trading
The gap between the trading technologies used by developed, emerging and frontier markets has been contracting rapidly over the last two to three years. Africa’s more peripheral stock exchanges have sought to modernize, largely in response to the interest shown in frontier markets by international investors.
During the 13th annual Conference of the African Securities Exchange Association (ASEA) in Nigeria in 2010, the ASEA identified Africa’s generally positive growth prospects as an opportunity to attract increased foreign investment at a time when growth prospects remain negative or flat elsewhere. For the host nation, the technology roadmap has been a positive one, with the recent change in management, there has been a major drive in transforming the exchange with respect to the business model and technology framework.
Growth in the Nigerian Capital Market
The recent growth witnessed in the Nigerian capital market can be attributed to the introduction of remote trading or Electronic Communications Networks (ECN) in 2005. This system enabled brokers to trade in the comfort of their offices without having to come to the trading floor. To date, there are 235 remote trading connections in Lagos besides those deployed in branches across the country. In addition, there are an increasing number of dealing member firms accessing the exchange system remotely.
The ongoing transformation with respect to technology initiatives is one of the major driving forces behind the development of the Nigerian capital market. The long term vision is to make Nigeria’s capital market one of the largest 20 economies in the world by 2020. The Financial System Strategy 2020 blueprint will be used to achieve these goals: developing and transforming Nigeria’s financial sector into a growth catalyst and engineering Nigeria’s evolution into an international financial centre.
Growth in the capital market has long been inhibited by constraints such as low liquidity levels, high risk perceptions and limited trading technologies. Lack of adequate communications infrastructure is another challenge for many market participants in moving towards an electronic trading platform.
As THE Nigerian STOCK EXCHANGE seeks to transform its electronic trading environment through the use of innovative trading technology – new matching engines, market data initiatives etc., the adoption of the FIX (Financial Information eXchange) Protocol within the market will become necessary to favourably position THE Nigerian STOCK EXCHANGE within the ‘financial global village’.
By using FIX, THE Nigerian STOCK EXCHANGE hopes to deliver the following benefits to the Nigerian capital market:
- Improved access to liquidity for market participants by enabling the electronic exchange of trade-related information. FIX compresses the time needed to discover price and transact.
- Help in price discovery and the promotion of price improvement. FIX makes it quick and easy to discover market depth across as many prospective trade counterparties as you wish.
- FIX delivers insight that helps manage risk, increase efficiency and improve investment performance.
- Reduced transaction cost – by automating the trading process (often referred to as STP) costs are brought down with the benefit of ‘lower costs’ for investors.
- Greater liquidity – electronic systems increase liquidity by attracting many market participants.
- Further competition by attracting new entrants into the industry.
- Increased transparency – with electronic trading markets becoming more transparent and risk is well managed through real time monitoring of trades.
- Tighter spreads – increased liquidity, competition and transparency means that spreads are tightened.
The CEO of THE Nigerian STOCK EXCHANGE, Oscar Onyema, is excited about the transformation-enabling opportunities that FIX will afford the bourse, saying “the adoption of the FIX Protocol in our market will set it apart from most of the sub-Saharan and frontier markets, by offering our investment community access to a world class connectivity platform and tools to make trading and price discovery more transparent and efficient”.
The vision to evolve into a world class stock exchange complemented by state of the art technology, to attract institutions, to enable efficient socio-economic development, to foster meritocracy, good corporate governance, innovation and entrepreneurship has been and will continue to be the ambition of the exchange.
For this to be achievable we see technology playing an increasingly important role. This is evident by the recent agreement between the NSE with NASDAQ OMX to implement its Xstream Exchange platform. The NSE is the first exchange in sub-Saharan Africa to go down this route.
Ade Bajomo, the NSE’s Executive Director for Market Operations and Technology states: “We see this as our first step in building a positive trading relationship with our local and foreign investors, by providing straight-through processing with real-time order management and execution, as well as real-time connectivity to broker systems and price feeds. This is a game changing initiative that will enhance the customer experience of doing business in the Nigerian capital market. In addition, we have other initiatives in the pipeline; offering brokerage services via smart phones and generating revenue through the sale of market data”.
We are hopeful that these various technology initiatives will enhance the capacity of the exchange and the capital market to become a critical source of funds for infrastructure and industrial development and contribute meaningfully to the actualization of vision 2020.