Investors snub day trading at NSE on charges

Same-day trading of shares accounted for only 3.4 percent of total deals at the Nairobi bourse, reflecting investors’ apathy towards buying and selling securities multiple times in a single day

Data from the Capital Markets Authority (CMA) indicate that shares worth Sh784 million were traded through day trading between its launch date in November 22 and January 20.

The Nairobi Securities Exchange (NSE) #ticker:NSE traded shares worth Sh23 billion during the period, with day trading accounting for 3.4 percent of the trades.

Day trading allows investors to buy and sell the same company shares several times in a single day with the aim of making gains from small price movements, sometimes riding on events that sway share prices.

Before November 22, investors could only sell a stock a day after purchase, denying them an opportunity to benefit from the price movement on a given day.

Analysts have blamed the commission's structure in Kenya’s capital markets for the slow takeoff, adding that fees paid to the NSE, the CMA and the Central Depository and Settlement Corporation (CDSC) must be lower compared to the expected price gain.

“For you to buy and sell in one day the volatility of the stock has to be higher than the commissions charged for it to make sense,” said Eric Musau, the executive director at the Standard Investment Bank.

“The average commissions are about two percent, including regulatory fees so you may need volatility of about four percent.”

In a bid to encourage uptake, the NSE offered day traders a five percent discount on the commission due to it per trade on the second leg of a transaction — meaning it will be levied at 0.114 percent compared to normal trades which are levied at 0.12 percent.

Traders reckon that the CMA and CDSC, which charge 0.12 percent and 0.8 percent of the value of the shares, should have also offered a discount to make day trading attractive.

“The cost structure of day trading makes it difficult to make a profitable trade - that is to say a stock would need to move a few percentage points during the day for day trading to make sense to an individual or firm. This has hampered the uptake. The authorities are aware and this should be solved in the near future,” Muathi Kilonzo, head of equities at EFG Hermes Kenya, said.

The same-day trade was expected to boost liquidity at the Nairobi bourse and help it increase revenue from commissions charged on transactions once activity picks up.

The NSE, which is home to 65 listed securities, had already seen a boost in its daily trading volumes after it introduced day trading on a trial run ahead of the November 22 launch.

This form of trading, however, carries a significant amount of risk, and in sophisticated markets, it is carried out mainly by experienced traders who have a deep understanding of the market and stocks.

Same-day trading is part of innovations aimed at boosting trading and liquidity at the NSE, which is the main entry point for foreigners seeking to invest in East Africa.

In 2019, the NSE launched the trading of futures contracts, offering investors index futures and single stock futures of the most heavily traded companies on the bourse.

It became sub-Saharan Africa’s second bourse to offer exchange-traded derivatives after South Africa’s JSE.

Known as the Next Derivatives Market, it will offer investors index futures contracts on the NSE-25 share index and single stock futures on Safaricom #ticker:SCOM , KCB Group #ticker:KCB , Equity Group #ticker:EQTY , EABL #ticker:EABL and BAT #ticker:BAT .

Safaricom, lenders KCB and Equity, brewer EABL and tobacco firm BAT are the most heavily traded and well capitalised stocks on the NSE.

Listed futures will have quarterly expiry dates and will all be initially settled in cash, the NSE said.

Market participants said the futures contracts will allow investors to diversify their portfolios and deploy capital more efficiently.

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