NCM 2020: Technology and the Nigerian Capital Market

Monday, March 01, 2021 /05:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics

Technology & TheCapital Market

Technology Adoption

Theadoption of new technology is not a fad but the tap root of the new assettrading outlook of the future. Investors are going to be less concerned withhaving face time with their equity and fixed income brokers as they would beconcerned with the simmering impact of economic and sectoral business changeson corporate bottom lines or instrument yields. The information they desiremust be timely, qualitative, and reliable. CMOs that cannot provide thisservice delivery quality, leveraging technology and data will soon find theirdoors shut, permanently. ArtificialIntelligence (AI) and Machine Learning (ML) are the new cogs of the spoke ofasset brokerage services.

Goingforward technology will constitute a bigger role in resolving clients creditrequests and investment preferences places trading decisions in the hands ofthe customer rather than the so-called specialist. The specialist will stillhave roles to play but the power of near monopoly over the relevant data neededto make intelligent decisions will gradually disappear.

Technologywill light a fire under the bed of CMO complacency and require traders andinvestment analysts to justify their incomes and ensure greater fidelity intheir advisory role.

Summary of the Online Trading Report

Inthe 2020 online trading report the authors noted that, "To be sure, local Nigerianfinancial markets are steadily rising to match global standards. Fintechcompanies are putting pressure on the brick-and-mortar paradigms of classictrading platforms and raising the performance bar for younger investorsinsisting on a different consumer journey from their forbears. Indeed, the newuser of financial products is fixated with speed, governance, responsiveness,and accuracy. Capital Market Operators (CMOs) that cannot fit into the revisedframework of client expectations have one choice, to fold up".

Theprognosis might have seemed brutal, but it was factual and relevant. Therealities of the new investor environment create a buying and selling protocolthat is different from the past. The new market perspective involves theapplication of technology to a new type of investor, a new expectation ofmarkets and a new set of regulatory requirements. The report further pointedout that, "Theevolving capital market environment is gruellingly competitive and crushinglyinnovative, the time for genteel paper-pushing has ended and operating firmsthat do not rethink, reimagine and restrategize their businesses could kisssuch businesses farewell as digital innovation becomes an ever more powerfulforce for change".

In the report it was explained that "The outbreak of thecoronavirus pandemic in late 2019 has made the case for remote businessinterface compelling. The report notes that the fixed income securities market isthe largest and possibly the most attractive segment of financial trades. Withthe government increasing activity in the treasury bill and bonds market tocope with the challenges of widening budget gaps, the market for publictreasury instruments has grown phenomenally over the last decade 2010-2020.While the Nigerian Stock Exchange (NSE) market capitalization rose fromN11.48trn in 2014 to N12.96trn in 2019, reflecting a six-year growth rate of +12.89%, the bond market saw growth from N104trnin 2014 to N232.68trn in 2019, showing a much faster-paced six-year growth rateof +123.73%".

"Despite the faster growth in the fixed incomemarket and the relatively larger size of government treasury trades, thedigital market still favours equities. The report discovered that 72.90% ofonline trades are equity transactions, 14.18% mutual funds transactions (mainlyequity), fixed income 5.29%, forex 2.19%, commodities 0.90% and others 3.35%.Investors appear be feel easier handling traditional equity businesses onlinethan any other asset class. The limited nature of online trades means that theonline market of asset trading in Nigeria is thin and narrow, therebyrepresenting an opportunity".

"If traders educate their clients and show themhow to make decent returns on trading different asset classes, the volume oftraded online business would increase exponentially, and investor portfoliodiversification would improve risk/return ratios. The online financial assettrading business appears constrained by a lack of strategic effort at gettinginvestors to migrate to digital mobile trading platforms. The problem appearsto be a lack of CMO-friendliness with digital technology and constraining 'muscle memory' that compel CMOs to revert to the comfortable and familiar.Fintech companies are, however, shaking things up".

"COVID-19 may have wobbled CMO perceptions andtheir operating preferences as remote interaction increasingly becomes the newnormal, with clients increasingly expressing a preference for transaction journeysthat reduce a human interface. Gen-Zers would want the customer experience tobe plugged into a mobile digital journey like their daily consumer retailtransactions. To improve digital online trading, CMOs will need to rethinktheir service-delivery buckets and drive more business to digital platforms".

Thedata research behind the report peeled the onion skins from market perceptionto show the following statistical results:

On reviewing the outcome of the 2020 survey thatreceived 785 responses, the top five fastest online platforms were:

Meritrade
Codros TradeButton
Investment-One EasyTrade
MyTradeBook, and
InvestNow

These platforms, according to the survey, provideinvestors with the fastest trading journeys but most of the experience relatesto equity trades. What informs the choice of online trading platforms? Thesurvey result suggests that users of online platforms made choices based on thefollowing considerations:

Easy trade execution(44.44%)
Quality of Research &Reports (11.89%)
Asset Recommendations(11.50%)
Referrals by friends(11.24%)
Corporate self-promotion(5.94%)
Market data search (1.42%)
Others (5.04%)

The consumer experience journey has shown thatfinancial sector clients continue to discriminate amongst online serviceproviders for the following key reasons:

Market/Company Analysisand Reports (42.71%)
Platform Trading Tools(32.00%)
Diversity of AssetsTradeable (11.61%)
Low Commissions (8.90%)
Others (4.77%)

S0 where do online clients desire to see improvementin service delivery experience? The research survey suggests that the mostsignificant areas of online service improvement required by clients are in thefollowing areas:

Research Reports (26.14%)
Other Tradeable AssetsApart From Equities (23.92%)
Lower Service Commissions(20.39%)
Better Trading Tools(14.51%)
Lower Initial Deposits(7.06%)
Others (7.97%)

The survey covers other areas of importance toretail and wholesale customers, building a body of information of strategicimportance to CMOs who would need to Rethink, Reimagine and Restructureplatform operations in a way that feeds into a product and process value chainthat fully recognizes the needs and wants of younger demography of investors.

Thereport for 2021 intends to upgrade its 2020 counterpart to dive deeper into therelative digital performances of CMOs. It would also review the buy-in ofgeneration Y and Z investors and dissect their user experiences, interfaces,and expectations.

New Trends

Witha younger profile of investors dependent on internet access and information,investor expectation has shifted to and amongst a younger demography. Investorsamong the new generation of Nigerians are quick to make global comparisons ofreturns and risks on the fly at the flick of a button.

Thiswill mean that CMOs will have to scaleup their service point responses andimprove their communication with customers using cutting-edge ArtificialIntelligence (AI) software. In addition, the broad and speedy access of clientsto market information across global jurisdictions suggests that more investorswould want to trade assets across countries.

Thelatter point might prove tricky as the SEC has not yet provided a frameworkwithin which Nigerians resident in Nigeria can trade (buy or sell) equity incompanies listed on foreign trading floors such as the New York Stock Exchange(NYSE), Chicago Board of Exchange (CBOE), NASDQ, or the London Stock Exchange(LSE). With investors wanting to take advantage of global opportunities CMOsand regulators will come under increasing pressure in 2021 to allow localNigerian clients trade in foreign equities. The recent challenges faced byfintech companies like Chaka with the SEC underscores the conflicts and opportunities in cross-jurisdictionaltrading.

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