Will today’s launch of day trading transform Nairobi Securities Exchange?

(Photo credit Evans Habil Nation Media Group Kenya)

Day trading in listed shares on the Nairobi Securities Exchange starts today 22 November. The programme starts with unleveraged intra-day trading and will expand to cover leveraged day trading once rules are in place. The aim is to boost liquidity and trading activity on this leading African stock exchange.

Geoffrey Odundo, CEO of the NSE, commented in this report in Business Daily: “Day trading is a welcome move for local investors who have previously lobbied for the activation of the intraday trading, as they seek to take advantage of intraday price movements and increase their profit margins. We are confident of a bullish market performance going forward.”

All investors who currently have accounts at the Central Depository System (CDS) will be able to take part in day trading. There are 65 listed securities on the trading system. Non-leveraged trading means buy orders can only be taken if the client has enough cash in their broker back office account and sell orders if they have the securities in their account.

David Wainaina, Head of Operations at the NSE, said that the exchange expects to double trading volumes from the current average of 22,600 transactions a month. In this interview on CGTN on YouTube , he explained that the bourse has upgraded its systems.

He said: “If we follow what has been done in other markets, we have seen markets that have deployed what we have done seeing in excess of 100, 200 folds. We expect anything not short of 50% of our volumes once this takes traction effective November.”

Trades are handled by the Central Depository and Settlement Corporation (CDSC), which provides clearing, settlement and depository services for listed securities. The trading participant (broker) has to set it up for all clients. Only trades executed on the same day for the same security on the same CDS account with a single broker will qualify for selection as day trades.

Discount on fees for trading shares in Kenya

Brokerage and transaction costs are major blocks to liquidity on African capital markets. Kenya is the most competitive bourse in East Africa, but according to news reports investors will face fees of up to 2.1% on the buy and another 2.1% on the sell. This is made up of 1.76% to the broker and 0.32% to the various institutions – 0.12% to the Nairobi Securities Exchange, 0.12% to the CMA and 0.08% to CDSC. However, investment advisory firm RisCura, which works with institutional investors, reported in Bright Africa that in 2018 brokerage fees were 0.7% in Kenya.

To encourage day trading, the NSE has offered a small 5% discount on the subsequent trades. The first leg will be levied at the normal fee of 0.12% and the second leg will be at 0.114%. The other fees are not rebated for day trading.

Costs of trading are a key factor hindering liquidity across African exchanges. Read these helpful articles on how brokerage costs affect your investment benefits. Here is a good article in Kenyan Wall Street on day trading in Nairobi and fees. Previously Ryan Hoover in Investing in Africa also gave a useful worked example.

This great article by RisCura gives an overview “The cost trading on (Africa’s) stock exchanges is significantly higher than developed markets.” Read it here.

The rules framework

The exchange announced on 26 October that the Capital Markets Authority had given it the go- ahead for day trading. The operational guidelines can be downloaded from the Nairobi Securities Exchange Rules page here. They fit within the framework of the Capital Markets Act (Cap. 485A), the Central Depositories Act 2000 and the NSE Equities Trading Rules.

Cash settlement proceeds in line with usual NSE Equity Trading Rules (subclause 6.8.1). Leveraged intraday trading will mean;

Buy and sell orders are allowed against margin money
It will be possible to set scrip level margins for both buy and sell sides separately
Any offsetting trade within the trading session will attract a day trading rebate.

According to the guidelines: “Leveraged IDT commissioning will be commissioned at a later stage after go live of non-leveraged IDT to ensure all policies, processes and guidelines are deliberated and agreed.

“Margin trading will be supported through the trading participants and therefore all trading participants need to profile their clients as they will be responsible for settlement as provided for in the current provisions.”