The Nigerian Stock Exchange (NSE) last Monday commenced the New Pricing Methodology and Per Value of equities securities. The amendments to the Pricing Methodology Rule which are expected to enhance market liquidity and transparency specifies the minimum pricing increments and minimum quantity traded which will change the published price of equity securities listed on the Exchange.
It will be recalled that on March 14, 2017, the Exchange received the approval of the Securities and Exchange Commission (SEC) to the amendments to Rule 15.29: Pricing Methodology, Rulebook of The Exchange, 2015 (Dealing Members’ Rules), (the Pricing Methodology Rule).
Summary of key changes to the Rule
The minimum price at which stocks on the NSE will now trade will be 1 kobo per share, prior to this, the minimum price floor was fixed at 50 kobo. Stocks have now been grouped into 3 categories: Group A: equities trading at N100 and above; Group B: equities trading at between N5 – N100; and Group C: equities trading between N0.01 kobo and N5.
The amendments to the Pricing Methodology Rule specify minimum pricing increments and minimum quantity traded that will change the published price of equity securities listed on The Exchange. The amendments also create an additional group classification for price movements of equity securities.
What you need to know about the new pricing methodology is that the minimum pricing increments and minimum quantity traded for equity securities is no longer the one-size-fits-all which has been used in the market for all equity securities, but now re-standardized and stratified according to equity price groupings.
The Group structure
Minimum Quantity: A trade of at least 10,000 units is required to move the price of equities trading at N100 or above (Group A); A trade of at least 50,000 units is required to move the price of equities trading at N5 or above but lower than N100 (Group B); and A trade of at least 100,000 units will be required to move the price of equities trading at N0.01k or higher but below N5 (Group C).
Trading period before re-classification
On how long a security will trade within a given price range before it is re-classified, the trading period before reclassification for each price Group shall be as follows: Group A: at least four of the last six months, or new equity security listings that are priced at N100 or above at the time of listing on The Exchange.
Group B: at least four of the last six months, or new equity security listings that are priced at N5 or above but less than N100 at the time of listing on The Exchange. For Group C, it is at least four of the last six months, or new equity security listings that are priced at 1kobo or above but below N5 at the time of listing on The Exchange.
How it works
For instance, if the last sale price of equity security in Group B is at N5, a Broker-Dealer cannot bid or offer at N5.01. According to the new Rule, the tick-size or minimum pricing increments for equity securities at N5 or above but below N100 is N0.05 kobo.
Therefore, only orders priced at N5.05, N5.10, N5.15, and which follow this sequence are permissible, and orders priced at N5.01, N5.02, N5.07, N5.09 or any figure not divisible by 5 to a whole number are not permissible.
BrokerDealers are prohibited from entering non-permissible orders in the trading engine. On the Effective Date of the Rule, what will be the Reference Price of an equity security that closed at N5.26 at the last trading session?
That equity security will be classified under Group B and the reference price at Pre-open stage will be rounded up to N5.30 on the date the amendments become effective. Also, for an equity in Group A that closed at N110.12 at the last trading session will have a Reference Price of N110.10 at Pre-Open on the effective date of the new Rule.
There are questions on what will be the Reference Price of an equity security that closed at say N5.26 at the last trading session. At that price, the new rules provide that such equity security classified under Group B will now have the reference price at pre-open stage rounded up to N5.30. Also, for equity in Group A that closed at N110.12 at the last trading session, it will have a Reference Price of N110.10 at pre-open.
Possible implication/analysts view
Beside the insurance names that trade at 50kobo, other stocks in the category C, trading at or below N5 can now also depreciate to 1kobo following the implementation of this rule, analysts added.
Others in this category include; Ftncocoa, John Holt, Multitrex, Afrinsure, Aso Savings, Deap Capital, Resort Saving and Loans, Evans Medical, Union Dicon, Chams, Courtville, Omatek, Multiverse, Thomas Wyatt, Japauloil, ABC Transport , Academy Press, Afromedia, Daar Communications, Secure Electronic Technology Plc, RT Briscoe and Tantalizer which all closed at 50Kobo on Friday 26th January 2017.
“We believe that this new Pricing methodology and par value will bring about liquidity in the equities market while the new rules will significantly impact stocks currently trading at 50kobo per share. The Insurance sector will be affected the most by this new rule as a number of the companies listed in that sector currently trade at 50kobo per share while other sectors on the NSE have one or two stocks trading at 50kobo”, said Capital Bancorp Plc analysts. They expect to see trading activities on stocks that trade in the 50kobo range.
“The policy may result in sharp depreciation of up to 37 listed securities which has not trade above 50kobo for a long time, especially insurance companies. It is expected to increase market liquidity and improved price discovery especially for lowly priced stocks”, United Capital research analysts said.
United Capital research analysts said with reduced minimum price of 1kobo, stocks in the C categories that are intrinsically less than 50kobo may be more prone to strategic trades or possible acquisition.
“Some of the insurance names listed above are the biggest suspects especially as the sector remains ripe for further consolidation, amid the proposed implementation of more stringent risk-based supervision guidelines by the regulators,” said United Capital analysts.