By Udeme Ekwere

Monday, 8 Nov 2010

Plans by the Nigerian Stock Exchange to increase the limit on daily share price movement from five per cent to 10 per cent may lead to instability in the capital market, experts have said.

The Managing Director, Lambeth Trust and Investment Company Limited, Mr. David Adonri, said, ”Increasing the price movement limit to 10 per cent from the previous five per cent is likely to increase the volatility of the Nigerian capital market. It may orchestrate gains or losses through rapid acceleration or deceleration of prices.”

He added that advanced markets in some other countries of the world had put in place various structures to guard against this kind of instability.

Adonri said, ”Although several advanced markets are limitless in price movement, volatility is subdued by the depth of their markets together with multiplicity of financial instruments.

“Because emerging markets are shallow and different in market structure, compared to advanced markets, certain activities in emerging markets are still administratively controlled to prevent disorder.

”In a bullish market, volatility will intensify profit, while in a bearish market, it will aggravate losses. Therefore, volatility can make or mar an investment. Efficient markets guide against excessive price volatility.”

The Chief Responsibility Officer, Value Investing Limited, Mr. Seye Adetunmbi, said that the NSE must ensure that such movement in price was backed by good fundamentals.

He said, ”As a going concern, those in charge of the the market must put on their thinking caps.

“If increasing price movement from five per cent to 10 per cent is an informed policy direction for the good of the market, it is in order.

”However, it should not be an all comers thing for all stocks. In essence, it is a movement that should be supported with fundamentals.”

The Interim Administrator of the NSE, Mr. Emmanuel Ikazoboh, recently said, that the NSE might soon increase the limit on daily share price movements from five per cent to 10 per cent.

He noted that the move was to boost liquidity in the capital market, adding that the five per cent cap on individual stock movements had drastically reduced liquidity.

Ikazoboh said, ”Within the next three weeks, I believe the case of the price cap will be determined. Papers have been prepared, we just need the (stock exchange) council’s and the Securities and Exchange Commission‘s approval.”

Source: Punch