Executive Summary

"Learn every day, but especially from the experiences of others; it's cheaper!" - John Bogle

John Bogle's comment is instructive, especially when it comes to the battles for the heart and soul of Nigeria's stock market over the last two decades (2000-2020). The market has grown both because and despite its principal officers, with each era introducing a pungent twist to a colourful tale. In two decades the market has pivoted between the philosophical and dramatic and the subdued and innovative with a snap period (2010-2015) of disruptive intervention. Each epoch represented part of an intense learning process, but unlike Bogle's admonition, it did not defer to the experience of others, it required passing through the furnace itself.

At the turn of the millennium Ndi Okereke-Onyiuke, Ph.D., erstwhile Director-General of the Nigerian Stock Exchange (NSE) realized that the growing adoption of technology and the increasing sophistication of tradeable market instruments required a new trading platform, one with enough flexibility to be scaled up to global standards but light enough to accommodate the existing state of play of market operators. She, therefore, consolidated her earlier initiative to digitalize the Exchange into a broader plan of improving both the trading platform and the investor's trading experience. 

The interface between the market and the investor was no longer wrapped in obscure practices but became open to the light of new trading rules and new trading methods (open-outcry and trader market muscle memory were replaced with keyboards, monitors, charts, research reports, Fibonacci algorithms, candlestick presentations and corporate market engagement, 'facts-behind-the-figures'). The new era had started but not without hiccups.

Problems that stuck to the shoe gum of the Exchange ranged from institutional inertia (the need to upgrade staff competence) to professional dispute management (engagements between the Exchange's managers and the organizations governing Council)  and a brief but uncharacteristic detour into politics. By 2009 and 2010 conflicts with the management of the Securities and Exchange Commission (SEC) piled additional pressure on the Exchange's management which was unhelpful. Unfortunately, the conflict resulted in the departure of Okereke-Onyiuke and key managers of the Exchange in 2010.

An Inconvenient Truth

One rarely spoken about problem Okere-Onyiuke faced was the attempt by certain Council members to railroad a demutualization process that would have allowed owners of bellwether stocks listed on the Exchange to take up major equity in the Exchange, creating what analysts at the time had perceived as conflicts of interest. While the Exchange would inevitably change from a stock broker-dominated Exchange to an investor-dominated platform, Okereke-Onyiuke was wary of allowing overwhelming individual financial influence to be the primary factor dictating the Exchange's ownership within the proposed demutualized arrangement. Okereke-Onyiuke's reticence to demutualize the Exchange at the time resulted in a powerful blowback from angry high net worth investors who felt hard done by as the ex-DG played a game of 'slow is beautiful'.  

The game, however, came with a heavy cost and by the time the dust settled on the manoeuvrings one of the Exchange's most ebullient and charismatic bosses had been shown the door.

As soon as Okereke-Onyiuke left the Exchange, Emmanual Ikhazoboh was nominated by the SEC as an interim administrator until the market would appoint a substantive successor. In the interim, the new boss worked with the NSE's old management team but without the effervescent presence of the former DG. The arrangement continued for a few months before the old guard was nudged aside (See Table 1).

Table 1: Okereke - Onyiuke's Curtain Call

The Next Drive-By

With Okere-Onyiuke given the heave-ho, Oscar Onyema, another Alumni of the New York Stock Exchange (NYSE) was brought in to steer the affairs of the Exchange for an initial five-year term as chief executive officer (CEO). Onyema quickly went to work on reviewing the Exchanges structure and processes and rejigged operations to suit the 'touch and feel' he considered necessary to build on Okereke-Onyiuke's legacy.

Onyema quickly set to work and decided that the Exchange needed to drive larger volumes in new tradeable assets by way of fresh listings and the introduction of instruments such as mutual funds, exchange-traded funds (ETFs) and exchange-traded Index funds. However, four years before Onyema's foray into product development, the Okekere-Onyiuke team had introduced a real estate investment trust (REIT) in 2007  called the Sky Shelter real estate investment trust. In other words, from 2007 the NSE had steadily built up new asset classes to give the market greater breadth.

Nevertheless, Onyema has shown an ability to push for innovation and asset growth as the NSE capitalization rose from N6.53trn in December 2011 to N13.51trn in December 2019, representing a compound annual growth rate of 8.41% (well above the average annual growth of the country's (GDP). The Exchange under Onyema has seen progress with capitalization and increasing sophistication but it has been trumped by the massively superior fixed income performance of the FMDQ Exchange which has seen an explosive growth of treasury transactions and commercial private bonds in the decade since 2014 (See Table 2).

Table 2: NSE, NASD and FMDQ - A Tale of Growth and Competition

Fresh off the airplane from JFK and with fire in his belly, Onyema came to the NSE with a few baseline ideas to upgrade the local equity market including the following;

• Introduction of market makers
• Achieve US$1trn market capitalization by 2016
• Creation of an Investor's Protection Fund
• X-Whistle, a whistleblowing platform to improve market surveillance
• Establishing ASeM, a framework designed to allow SMEs to gain access to the stock market

The security market administrator's goals at the time were laudable and mirrored global developments, but after ten years at the helm of the NSE and with a few months to go from his retirement at the end of Q1 2021, the outcomes of his early initiatives remain patchy (See Table 3).

Table 3 Inside Onyema's Strategy: The Promise and The Weakness

Setting Fire To The Rain

A flashback to 2010 unveils an unflattering period in the life of the Exchange, with SEC and the NSE at each other's throats and the Capital Market Committee of the House of Representatives of the National Assembly in an uproar over bribery allegations.

The capital market was in a fiery flux as accusations and counter-accusations by regulatory managers went flying and members of the national assembly had their reputations squashed like mashed potatoes. According to a local stockbroker with 28 years of uninterrupted market experience, "you had to be scared of the internal regulatory wranglings going on because foreign investors were growing increasingly wary of entering a market with supervisory chaos seeing that local investors were busy holding onto rosaries praying that this 'too shall pass'. As a trader, you had to be frightened"  he said. 

The 2010-2015 period saw the Securities and Exchange Commission (SEC) headed by an elegant, cerebral but domineering ex-AfDB executive, Aruma Oteh, who took over the ropes with zeal. Oteh had a clear agenda to quickly introduce private sector management style to the hallowed bureaucratic traditions of SEC and she could not be bothered with whose ox was gored, including that of long-standing senior SEC executives. It did not take long for Aruma's aggressive (some say pugilistic) management style to rile not only the nerves of her SEC colleagues but also members of the oversight committee of the market at the national assembly (NASS). Put simply, Oteh set fire to the rain.

Whatever position analysts may take concerning the Oteh days at the SEC, she was a force for both good and mayhem. She grabbed the market by the scruff of its neck and shook it hard, very hard.

A few of Oteh's contributions to the market included but were not limited to the following:

• She is believed to have restored confidence in the market after the 2007 collapse. Oteh was said to have been bullish on enforcement, improvement in market rules and regulations, and the education of investors. Part of Oteh's creative initiatives was a partnership with Nollywood to produce movies, an annual integrity award to promote integrity and capital market knowledge.  Under Oteh SEC established the National Investor Protection Fund and strengthened its Administrative Proceedings Committee (the concept around the fund is still ambiguous and market analysts are doubtful of the fund's appropriateness)
• The market was said to have been deepened and broadened under Oteh  those who make this argument point to  product innovation, new listing rules, bond market reforms (which brought it almost at par with the equities market and made it attractive enough for Triple-A issuers such as African Development Bank (AfDB) and International Finance Corporation (IFC) to issue bonds), the introduction of  Exchange Traded Funds (ETFs), widening of participation in the markets through licensing and coming - on - stream of other capital trade points like National Association of Securities Dealers (NASD) and Financial Market Dealers Quotation (FMDQ) that created greater market competition, especially in the area of traded fixed interest securities
• Oteh was said to have improved market integrity through zero tolerance for rule infractions.  The regulator's enforcement framework was alleged to have been significantly strengthened. Apart from other measures SEC, under the erstwhile DG, set up an 18-man Nigeria Police Force team which was a resident enforcement team to respond to enforcement matters with promptness.
• SEC, under Oteh was said to have strengthened disclosure requirements and pushed for the speedy implementation of international financial reporting standards (IFRS) for listed companies.
• In 2011 the SEC published a new code of corporate governance for the Nigerian markets which was aimed at standards improvement in line with international best practices.  In addition to a significant improvement in corporate governance, the code has become mandatory. For example, the SEC's role in strengthening corporate governance at Ecobank Transnational Incorporated(ETI) was a highpoint.
• A major Oteh-contribution at the SEC, which was widely recognized, was her commitment to human capacity development which she elevated to an indelible height. Oteh was keen on strengthening the capital market as a whole by markedly improving personnel and technological capabilities at the SEC through the training and retraining of human capital.

Oteh's firestorm engagement at the SEC may have been unsettling but it came with benefits as well as costs.

Section one of this report looks at a brief history of the NSE, how business activities were carried and what influenced investment decisions. It also looks at the creation of the CSCS and what led to its creation, the growth in market operators over the years, improvement in market confidence through logic rather than passion or 'animal spirits'. The section also looked at changes made within different management eras, increased growth in the number of IPOs, LBIs as preferred methods of capital raise by most companies.

Section two: this section addressed the issue of the market's unpredictability and investors reaction to market dynamics. The impact of unexpected shocks on the value of the capital market. The section also answers the question 'does the Nigerian Stock Exchange reflect the state of the domestic economy?' and foreign and domestic investor sentiment on the market. It also looked at the long road to achieving a market capitalization of US$1bn. This section also looked at the transition from AseM to Growth Board and its related matters. The section brought to the surface opportunities presented by the COVID-19 depressed economy, it also answers the question 'if the political risk is a matter of concern for the market and market players.

Section three: this section talks about the need for demutualization, the niggling problems associated with demutualization and the sustained fear of the power that will be controlled by the board of directors and potential conflict of interest of a demutualized Exchange. This section also talks about actions that could lead to the success or failure of a demutualized exchange and its prospective value chain drivers. The addressed how AI could be used for the identification of arbitrage opportunities and the disruption of asymmetric loopholes. The section spoke to the proposed CISI bill and its implication for the adoption of a professional monopoly, it disagreed with its proposed disciplinary process which undermines the Investment and Securities Act of 2007 and the establishment of an Investment and Securities Tribunal (IST). The section argues that the CISI bill as drafted was mortally and morally flawed.

Reports - https://t.co/ftrAErs7IJ