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A Memo to SEC on the NSE – CSCS Trade Alert By Zainab Usman
A few days ago, I saw some adverts in various national dailies on the NSE-CSCS (Nigerian Stock Exchange – Central Securities Clearing System) Trade Alert service (see for example Thisday of September 7, 2005). The service is planned to take off on October 03, 2005. According to the advert, the Trade Alert is a pre-requisite for all transactions on the floor of the NSE effective October 03, 2005.
For those who might not know, the Trade Alert is a service which sends Text messages to GSM lines when there is a transaction on an Investors account. For example if 100 units of my holdings in company XYZ are scheduled to be sold on the floor of the NSE, a text message will be sent to me to confirm my acceptance or rejection of the transaction.
There is not much wrong with the Trade Alert in theory, however, its implementation as planned is an unnecessary burden to investors. It’s a burden on investors because its compulsory and cost N12,000 (twelve thousand Naira) a year. Let me explain.
How would you feel if your bank decides that for any cheque you issue no matter the amount, they would send you a text to confirm the cheque and you must pay N12,000 for this service every year? The bank is already collecting a commission on turnover from you and also makes money from the funds you leave in your account. It is their responsibility to ensure they pay only duly issued cheques. Banks in Nigeria today confirm cheques issued subject to a limit without charging the customer. In my view, if the NSE-CSCS must confirm then it should be at their expense. Because it is their responsibility to ensure only valid transactions are handled by them.
Furthermore, any investor who has an investment of N240,000 (two hundred and forty thousand Naira) or less will effectively be investing for the benefit of the NSE and CSCS. The charge for the Trade Alert is N12,000 per annum. The average dividend payout of companies quoted on the NSE is less than 5%. Lets assume its 5%. It means an investment of N240,000 will yield on average N12,000 in dividends. However, that is the cost of the Trade Alert. This might sound simplistic, as some might argue that what about capital appreciation? Well we know from Finance theory that the value of an investment held until the company is wound up is the value of all dividends paid plus a final liquidating dividend. So if you spend all your dividends paying for the Trade Alert, you will only end up with the liquidating dividend which might be nothing after the company pays its creditors.
Another assumption of the NSE is that all investors reside in cities where GSM exist. We know that is not a valid assumption. GSM providers have not covered the whole country. So are these people exempted?
In addition, why make it compulsory? This service should be voluntary for those who want it. However, given that the NSE is a private monopoly I am not surprised. They know investors for now have no choice. Perhaps, its time to reconsider another exchange. The NSE kicked against this idea a few years ago. Not surprising, given the fat commissions it currently makes. In August alone, the NSE received N254 million in commissions form a turnover of N25.46 billion (1% of turnover). This information is on their website. This is a significant amount of money, yet the NSE wants to transfer their responsibility to investors. So what is the commission for?
With the Trade Alert, the NSE/CSCS have shown they cannot do an adequate job safe guarding investors money. What they are saying is that your broker can sell your shares without your permission and the only way you can stop that happening is by subscribing to the Trade Alert! I do not accept that. Investors get a quarterly statement. If you realize your stockbroker sold your shares without your permission, you should ask for a replacement and should report the broker to NSE. The NSE should take action which could lead to the withdrawal of the brokers license. So why should I be punished by paying a fee because my broker is dishonest and has no business having a license?
I therefore call on investors in the Capital market to reject the compulsory Trade Alert. It should be a voluntary product for those who feel they need it. I also call on Securities and Exchange Commission to reconsider the approval if any they gave the NSE in the interest of investors. It should be the responsibility of the NSE to ensure the security of investors shares traded on its floor. That is why we pay them 1% commission.
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