Department of Banking and Finance

University of Ado-Ekiti, 2000

Published for
Department of Banking and Finance
University of Ado-Ekiti.
by
Forthright Educational Publishers
(A Division of Forthright Consult Limited)
4, Majaro Street, Onike, Yaba.
c/o P.O. Box 166
Unilag P.O., Akoka
NIGERIA.
The Nigerian Journal of Banking and Financial Issues '(NJBFI) provides a
unique forum for the articulation and dissemination of applied research by
academics and professionals in the field of Banking and Finance or related
disciplines. It is bi-annual journal published by the Department of Banking and
Finance University of Ado-Ekiti, Nigeria.
The Journal contains analysis of banking and financial issues relevant to the
Nigerian economic experience and financial policies. Opinions expressed herein
are those of the authors and not necessarily those of the Department of Banking
and Finance or Forthright Consult Limited.
All rights reserved. No part of the publication may be reproduced or transmitted
in any form or by any means electronic, mechanical, photocopying, recording or
otherwise or stored by any retrieval system of any nature, without tht prior
written permission of the copyright bolder.
ISSN 1119-8494
Subscription Rate:

Nigeria:
Students - N300.00
Others
- N500.00
Foreign:
- US$10

Printed in Nigeria by Forthright Educational Publishers, Lagos.

Nigerian Journal of Banking and Financial Issues Vol 3 No. 1.91-100

THE IMPACT OF AUTOMATION ON THE NIGERIAN

STOCK EXCHANGE
Jackson O. Olujide*
Introduction
The Nigerian Stock Exchange' has made strong strides in the last
decade as a result of key financial reform decisions taken in the last few years
and the increasingly positive steps towards good governance. Furthermore, some
infrastructure continues to be laid for favourable operation of the stock exchange
nation-wide. These efforts and successes to date have, already begun to
demonstrate that dividends are payable from system wide reduction of financial
repression, removal of financial asphyxiation and from the exercise of financial
and fiscal disciplines in the management of the country's economy and
resources..
As a result of the reforms of the last few years, the Nigerian Stock
Exchange has no doubt achieved remarkable growth within the last two decades
of its existence, there has also been enormous expansion hi its operations in
terms of wider operational coverage. These developments have increased
substantially the volume of transactions and range of services offered to the
public. In addition, the Stock Exchange in concert with other facilitating
institutions provide employment opportunities for Nigerians as well as
encouraging the acquisition of knowledge, skill and professionalism in stock
brokerage. The Stock Exchange therefore represents a veritable vehicle So the
continued operation and attraction of foreign capital for life nation &
development.
But in spite of the string of aforementioned achievements, there is the
general feeling that the Nigerian Stock Exchange is still underdeveloped
therefore not yet "in a position-to contribute effectively to the development
needs of the economy. The underdeveloped nature of the Stock Exchange is
reflected in its system of trading. The Nigerian Stock Exchange operated the
"call-cover" system of trading from inception to 1997 due to the paucity of
securities dealt in. and the comparatively small size of the market.
In this call-over system, securities are called individually and members
(stock brokers) indicate interest whether to buy or sell.
During the call-over-days of trading, it took investors an average of six
months to get share certificates from Registrars to quoted companies. This
situation has made it possible for an investor to maximise possible opportunities
in the market arising from price fluctuations.
Dr. Jackson O. Olujide is of the Dept of Business Administration. University of llorin.

Automation and the Nigerian Stock Exchange

92

However, in April 1997 a new trading system called the Central

Securities Clearing System (CSCS) was introduced. This system makes it
possible for an investor to deal on securities bought five days after the
transaction day (i.e., T + 5 = transaction day plus five days). Thus this
automated trading system which makes it imperative for the CSCS to clear and
settle all transactions on the stock exchange within T+5 days has eliminated all
manual processes of trading on the exchange.
The manual system of trading causes a lot of delay in the issuance of
share certificates by company Registrars to investors consequent on a secondary
market transaction. Therefore, most Nigerian investors are obliged to be content
with dividend payment and bonus issues rather than earning more income from
price fluctuations.
The situation has led to a very low volume of trade over the years as
reported by the Nigerian Stock Exchange in its fact book 1999. This is a
consequence of the manual clearing system. Other drawbacks of the manual
trading system include;
delay in issuing share certificates to shareholders
cancellation of share certificates of selling shareholders and issuance of
new share certificates for a buying shareholder per transaction.
Constant signature verification before sales is allowed.
Dealing members were short-selling
Failed transaction
Loss of share certificates, and so on.
From the foregoing therefore, this study is designed to examine tit
impact of automation on the volume of trading on the Nigerian Stock
Exchanges' Specifically, the study intends to achieve the following objectives:
(a)
To determine the average annual volume of shares traded on the
Nigerian Stock Exchange during the call-over system of trading.
(b)
To determine the average annual volume of shares traded on the
Nigerian Stock Exchange after the introduction of CSCS.
(c)
From (a) and (b) above, to determine the impact of automatic on the
traded volume of shares on the Nigerian Stock Exchange.
Institutional framework
The Central Securities Clearing System
The last decade saw monumental changes in economic environment
propelled by major technological innovations in telecommunications and
information technology resulting in integrated world financial markets with the
emergence of globalisation or cross-border investments. In 1988. the Federation
of International Stock Exchange (FIBE) of which the Nigeria Stock Exchange is
a member, commission a group of thirty (G 30) experts to undertake a study of
world stock markets. The nine (9)

Nigerian Journal of Banking and Financial Issues

93

key recommendations of the G-30 have become global stock market yard stick
for clearing, settlement, depository, registry and custodian systems.
In view of the foregoing, the Nigerian Stock Exchange on July 29,
1992 incorporated a subsidiary company called Central Securities Clearing
System Limited with a mission to speed up the delivery system of the Nigerian
Capital Market through the introduction of efficient, effective securities,
clearing, settlement and custodian mechanisms with minimum risk.
This was to be achieved by the implementation of the Stock Exchange
Management System (SEMS) software application package. The SEMS is a four
(4) module package:

Clearing/Settlement: Depository/registry (CDS) system: Custodian services

Board and automated trading and market control and surveillance

Broker management and licensing and stockbrokers banks
Corporate profile management and statistics including INDEX.
The Central Securities Clearing Systems Limited was commissioned on April 8
1997 and commenced operations on April 14 1997.
The CSCS, in addition to clearing and settling trades, functions as:
- Central depository for share certificates of companies quoted on the
Nigerian Stock Exchange.
- Sub-registry for all quoted securities (in conjunction with registrars of
quoted companies).
- Issuer of central securities identification numbers to stock holders
- Custodian (in conjunction with members) for local and foreign instruments.
The system operates a T + 5 settlement cycle for transaction on the
exchange, in conformity with the FIBE standard for emerging market to which
Nigerian Stock Exchange market belongs. The T + 5 (transaction plus five days)
settlement cycle is facilitated by the immobilisation of share certificates in a
central location which in turn enables transaction to be processed in an
electronic book entry form.
Thus, physical delivery of share certificates for secondary market
transactions to fulfill settlement obligations has been replaced by electronic
credits and debits to shareholders stock positions.
Benefits of the CSCS include among others:
- Reduction in incidence of loss or stolen share certificates
- Elimination of late delivery of share certificates
- Reduction in the cost of maintaining register of share holders
- Increased liquidity of stock
- Increased transparency of market
- Increased market turnover
- Encourages foreign investments
- Ensures prompt inter-broker money and stock settlements

Automation and the Nigerian Stock Exchange

94

Increased efficiency and profitability of stockbroking firms

Reduction of operating costs.
To maximise the gain of the Central Securities Clearing Systems Limited,
the call-over trading system was in April 1999 replaced with the automated
trading system with bids and offers of securities no\v matched by stockbrokers
on. the trading floors of the Stock Exchange .through a network of computers.
Secondary market transactions are now consummated by stock brokers
through the use of computers within the hours of 11.00a.m. till all bids and
offers have been executed (about 1.30p.m. on the average).
Research methodology
The Nigerian Stock Exchange is not the only institution in the capital
market, but it is the only capital market institution in which both the. central
securities clearing systems limited (CSCS) and Automated Trading System
(ATS) are relevant, being the only market in which transactions on quoted
securities are perfected. It then fits in perfectly into the objectives of this study.
And therefore, represents the study sample.
The main source of data for the study is the secondary source.
Information was obtained from both internal publications of the Nigerian Stock
Exchange, such as:
the Nigerian Stock Exchange Factbooks
the daily official list of the Nigerian Stock Exchange: and also
from external sources such as
Publications by the central securities clearing system limited.
Data obtained were analysed by the use of simple percentages in order to
highlight trends and summarise result;
The parameters considered in this analysis include:
Market capitalization
Number of shares traded
Daily average volume
Number of stock broking firms
Number of listed companies
Number of listed securities
Data analysis and discussion of results
The results of our data analysis based on the above parameters are presented as
follows:
'

95
Table 1
Market Capitalisation
Year
Post ATS 1999
Pre ATS 1998

Market Capitalisation
287.2 billion
260.8 billion

% Change
10

Table 1 shows a pre-ATS market capitalisation of N260.8 billion in 1998 rising

to N288.2 billion during the six months post-ATS in 1999. This represents an
increase of 10%.

Table 2
Percentage Changes in Market Capitalisation
Year
Market Cap. (N Billion) % Increase
1998
263.3
461
1997
292.0
523
1996
285.6
509
1995
171.1
265
1994
65.5
40
1993
46.9
~
1993 was taken as the base year for the purpose of this analysis.

Figure 1: Market capitalisation (N billion)

96
Table 3
Number of Shares Traded
Year
Number of Shares Traded (N Billion)
% Increase
1998
2.1
343
1997
1.3
174
1996
0.882
86
1995
0.397
-16
1994
0.524
10
1993
0.473
The percentage increase was obtained using 1993 as the base year.

Figure 2: Number of Shares (in billions)

It is evident from Table 3 that the volume of shares traded increased
substantially in 1996 following the de-regulation of the market and much more
in 1997 after the introduction of the Central Securities Clearing System.
The study also considered the total number of shares traded on the
exchange in the half-year period (January - June) 1998 and 1999
Table 4
Percentage Changes in Number of Shares Traded
1

/2Year (Jan-Jun) No. of Shares Traded (Million)

Post ATS 1999
965.9
Pre ATS 1998
738.3

Percentage Change
30
--

Nigerian Journal of Banking and Financial Issues

97

Turnover on the exchange during the six months ended June 1999 stood
at 965.9 million shares, up by 30% due to the successful transition to the
Automated Trading System (ATS).
Table 5
Year
1998
1997
1996
1995
1994
1993

D.A.V. Million
8.4
5.3
3.5
1.6
2.1
1.9

% Increase
342
179
84
16
16
-

Figure 3: Daily Average Volume

Table 5 shows that there was a significant increase in the average
number of shares traded on the floors of the exchange in 1997 and 1998
following the deregulation of the market and introduction of the Central
Securities Systems Limited. The pre-CSCS rate of increase ranges from 10% to
84% between 1993 and 1996 while for the post CSCS years it was between
179% and 342% in 1998.

Year
1998
1997
1996
1995
1994
1993

Table 6
Number of Stock broking Firms
No. of Stock broking Firms
226
217
162
162
140
140

% Increase
61
55
15
15
0
-

Automation and the Nigerian Stock Exchange

1993

1994

1995

1996

98

1997

1998

Years

Figure 4: Number of Stock Broking Firms

Table 6 shows an improvement of between 55% and 61% in the
number of stockbroking firms involved in daily market transactions on the floors
of the Nigerian Stock Exchange in 1997 and 1998 respectively sequel to
automation introduced in 1997.

Year
1998
1997
1996
1995
1994
1993

Table 7
Number of Listed Companies
No. of Listed Companies
% Increase
186
6.7
182
4.6
183
5.1
181
4.0
177
1.7
174
-

MR. AWE,
DRAW COMPLETE
GRAPH

1993 1994 1995 1996 1997 1998 Years

Figure 5: Number of Listed Companies

Nigerian Journal of Banking and Financial Issues

99

Table 7 shows that there were no significant changes in the number of

companies listed on the Nigerian Stock Exchange for the period under review
both "Pre and Post" automation.
Table 8
Number of Listed Securities
Year
1998
1997
1996
1995
1994
1993

Govt.
Stocks % Change
19
22
24
28
35
37

-49
-41
-35
-24
-5
-

Industrial
Loans
59
60
69
67
64
71

% Change
-17
-16
-3
-6
-10
-

Equities
% Change
186 7
182 5
I53 5
181 4
177 2
174 -

Whilst the number of government stocks and industrial loans decreased

progressively over the years, largely due to maturity, redemption and eventual
de-listing, the number of equities (ordinary shares) increased progressively due
lo new listing of securities.
Results obtained from the analysis of data for this study show that the
introduction of automation in the Nigeria Stock Market acted as a catalyst to
both the volume of trade consumated on the floors of the exchange from 473
million shares in 1993 to 2.1 billion shares in 1998. It also shows an increase in
the number of stockbroking firms from 140 in 1993 to 226 in 1998.
Conclusion
The introduction of the CSCS and the ATS have increased the tempo of
trading activities on the Nigerian Stock Market. They have increased
substantially the following indices: market turnover, transparency: investor's
confidence: foreign investments: liquidity and vibrancy of the market: and
prompt inter-broker money and stock settlement..
In concluding, this study wants to make the following
recommendations so that the Nigerian Stock Market can enjoy fully the
dividends of automation. These include the following:
i) The CSCS and the ATS should accommodate all quoted securities. For now
only equities are traded through the CSCS and ATS: other securities such as
government stocks, industrial loans, bonds and preference stocks are yet to
be accommodated in the current automation process,
ii) The transaction cycle currently T + 5 for settlement of cash and stock
should be reduced further to T + 1 through the use of a single settlement

Automation and the Nigerian Stock Exchange

100

bank as opposed to several settlement banks being used now.

iii) The trading hours should be extended beyond the present closing time of
1.30p.m.
iv) Remote trading where stock brokers would be able to trade from the
conveniences of their offices should commence soonest, this would involve
in the introduction of computer networking,
v) Licensing of stock broking firms should be liberalised,
vi) There should be a separation of functions between jobbers and dealers and
finally the Federal Government of Nigeria should float new development
stocks for capital projects instead of other forms of borrowing.
These recommendations, it is hoped, would further improve on the
automation process already commenced thereby enhancing the capital
mobilising capabilities of the Nigerian Stock Exchange.
Reference:
Adetunji. W. (199X). "The Nigerian Capital Market. The Task Before Market
Operators." A paper presented at the 2nd Annual Conference of the
Chartered Institute of Stock Brokers. Lagos Nigeria.
-(1997): Foreign Investment Opportunities. Potentials and Rimers in
Capital Markets- A Paper Presented at the Alriean Conference of Stock
Brokers: Registrars. Investment Bankers and Fund Managers. Lagos.
Nigeria.
Alile. H.I. (1997): -Financing Public Project through the Capital Market." A
Paper Presented at the International Conference on Promoting Capital.
Market in Africa Lagos Nigeria
-(1992): Establishing a Stock Market: The Nigerian Experience. A paper
presented at the International Conference on Promoting Capital
Markets in Lagos Nigeria
Nigerian Stock exchange (1999): Fact book.
Nigerian Stock exchange (1999): Daily Official List.
Olowe. R.A (1998) Effective Pricing of Securities in the Secondary Market."
Chartered Institute of Stockbrokers. Lagos - Nigeria.
Wall Street Trade Co. Ltd. (1999): Custom Street Review: A Newsletter. Vol. I,
Issue 2.
Ying. C.C. (199f,): "Stock Market Prices and the Volume of Sales." Economic Africa, "volume 34.