Starting August 1, the Nairobi Securities Exchange (NSE) will be making changes to its trading rules where the minimum trading limit of 100 shares will be removed, allowing investors to buy and sell in multiples of one share on the normal trading board.
At the same time, the NSE is doing away with the separate odd lots trading board where investors could deal in multiples of less than 100 shares.
Here, the Business Daily looks at the implications of these changes for investors and the NSE’s rationale behind the move.
The trading boards are electronic platforms or systems where shares and other securities, such as bonds, are traded. Under the older rules that are being changed, NSE has two platforms, known as the normal and odd lots boards, whose main distinction is the 100 shares minimum trade rule.
Both boards sit across the NSE’s main and SME market segments.
The odd lots board, where one can trade in multiples of less than 100 shares (known as odd lots), however comes with additional limitations such as being restricted to limit orders (where the seller or buyer had to specify a price), unlike the normal board where orders can be placed at market price, effectively hastening their sale or purchase.
Further, odd lot shares cannot be entered into the system during the pre-open period or be considered for execution during opening auction, making it harder to shift them compared to normal board shares.
In updated rules, NSE will have a normal board and a recovery board for each of the two market segments, with the minimum number of shares tradable now at one unit, down from 100.
The recovery board will temporarily host listed firms that are technically insolvent, non-compliant with listing obligations, or whose operations are considered prejudicial to the interests of investors.
There will also be a block trade board on the main market segment. It will handle the sale of shares whose value exceeds Sh3 billion and constitute five percent or more of an issuer’s total issued shares, or those trades below Sh3 billion but which constitute more than 15 percent of total issued shares, both subject to a maximum of 24.99 percent.
How is the change in trading boards going to affect investors?
For an investor, the lowering of the trading limit to one share from 100 shares will have an immediate impact in terms of market access.
One can now go into the market and freely buy or sell shares in multiples of less than 100 on the normal board, allowing more people to access stocks that have a high nominal price and thus a high entry barrier.
While you could access smaller numbers of shares on the odd lots board, availability is wholly dependent on supply of such odd lot shares by investors already holding them, making it an illiquid board where sellers often have to offer price discounts to get buyers.
By introducing a recovery board for financially stricken issuers, the NSE is also giving investors a clearer picture of the risk profile of listed companies, allowing for more informed investment decisions.
How did the NSE end up with odd lots if trading is limited to a minimum of 100 shares?
One of the sources of odd lot shares at the NSE is the old share certificates that were in use before the introduction of the electronic share registry in 2004.
These certificates did not have the 100 shares multiple rule, and therefore brought in shares of single multiples when they were immobilised into the electronic depository.
The regular share bonus issuances and splits done by listed firms also generate odd lots, depending on the multiples of division or allocation applied to an issuance.
For instance, a person holding 500 shares in a bonus issue of one share for every 10 held would end up receiving an additional 50 shares. Other odd lots were generated via the oversubscribed initial public offers (IPOs) of the mid to late 2000s, which saw pro-rata allocations of shares that were based on a percentage of the units for which one had applied.
Safaricom’s IPO in 2008, for instance, saw retail investors given 21 percent of the shares they applied for, meaning that a person who had applied for the minimum 2,000 shares was given 420 shares.
Does the rule update change how one buys or sells shares?
The process of buying shares does not change with the new rules. An investor will still need to go through their stockbroker to place orders, either physically or through online trading platforms.
The only change is that one can now place orders freely for smaller share sizes, lowering the entry barrier for counters with high nominal prices.
For the NSE, the single share multiple trading will have an effect on the determination of the daily average prices of shares. If the number of shares traded in a day is below 100, the average price shall be deemed to be the previous day’s closing price.
