NSE’s automated system collapses soon after launch

The Nairobi Stock Exchange was hit by confusion on Monday after the much-hyped automated trading system for bonds failed to function, barely hours after its launch in a ceremony presided over by Prime Minister Raila Odinga and Finance minister Uhuru Kenyatta.

Most traders were forced to revert to the old manual system of buying and selling bonds after the new automated platform reportedly failed to show the volumes of treasury bonds that investors were willing to trade.

Though about eight of the listed corporate bonds are yet to be converted into electronic bond accounts tradable on the new system, treasury bonds (which account for 92 per cent of bonds listed at the stock exchange) were expected to have been uploaded on the new system for trading.

Bond dealers who had predicted an upsurge in trading volumes reported that the new system had “hitches” which needed to be rectified.

The new system was activated in unclear circumstances even after the Capital Markets Authority (CMA) had declared that there were no rules to run it.

Mr Odinga and Mr Kenyatta presided over the listing of the Sh25 billion KenGen infrastructure bond which was expected to become Kenya’s first ever fixed income paper to trade on an automated trading system (ATS).

But fixed income dealers at Dyer and Blair, Afrika Investment Bank, Genghis Capital and Standard Chartered Bank told Business Daily that trading on the ATS did not start as was anticipated.

“Treasury bonds are still not tradable on the new system, it appears that IT (information technology) people are still working on a few issues,” said Mr Martin Mbugua, the Dyer and Blair general manager for fixed income.

Head dealer at Genghis Capital Mbuthia Irungu said dealers were only able to view the KenGen bond on their live trading screens, forcing them to trade all other listed bonds manually.

Fixed income trader at Standard Charted Bank James Chweya said no bank had completed a transaction on the new system.

The KenGen bond reportedly had Sh77 million traded.

The bond, which initially aimed to raise Sh15 billion received subscriptions for Sh26.5 billion, prompting the power generating company to take up an extra Sh10 billion through a special “green shoe” option.

The NSE said confusion on the pricing of the KenGen bond had initially stalled trading in the morning, but added that normal trade resumed after a clarification was issued by Standard Investment Bank which was the sponsoring broker for the issue.

“Some days fell on a Saturday as per the original schedule which caused some confusion,” said the NSE in a response to our queries.

The pricing of bonds is normally calculated based on the remaining period to maturity as well as the accrued interest as at the date of sale.

Mr Mbugua said market players had not yet developed a formula that is acceptable to all for pricing some bonds.

He said there were still differences on how to price the Sh18 billion government infrastructure bond which was floated last year and is to be redeemed beginning the sixth year.

In his address during listing of the KenGen Bond, the NSE chief executive, Mr Peter Mwangi, said the stock exchange had linked its system with those of the Central Bank of Kenya (CBK) and the Central Depository and Settlement Corporation (CDSC) to facilitate the automated trading of bonds.

“From this day forward, all immobilised listed bonds such as the KenGen bond will trade in a fully automated environment, right from the placement of orders, to matching and finally settlement,” said Mr Mwangi.

Early last week the CMA sent letters to the CDSC and the NSE demanding that they address a list of regulatory issues before it could approve live trading of bonds at the stock exchange.

“In approving an automated trading and settlement system for bonds, the authority has to satisfy itself of the integrity of the system by ensuring it fully complies with the Capital Markets Act in consideration of the wide interests of the capital markets,” said the CMA a statement.

But on Monday the NSE said it had addressed all the outstanding issues as demanded by the regulator.

“It is on the basis of our response as NSE that the regulator approved the automated trading,” said the exchange in a statement.

The CMA, however ,did not respond to our queries.

The process of automating trading at the NSE started in 2004, with the first phase being launched in 2006 when automated trading of shares using Central Depository System (CDS) accounts went live.

The 2006 KenGen initial public offering was the first to be floated on the automated trading system for equities.

There was a rapid increase in average equity trade volumes at the stock market since then attributed to transactional efficiency that came with the new system and market players were expecting the trend to reflect in the bond market.

Besides speedy settlements, the new system also promises increased transparency since all investors will have real time access to information on sales volumes and prices.