Scholar Nassim Taleb describes markets as operating on zero intelligence of participants. With the right structures in place, a well-functioning market will be produced even by a collection of the less intelligent participants.
Last week, we woke up to reports that the Nairobi Securities Exchange had petitioned the Capital Markets Authority (CMA) to amend regulations that impose term limits on the bourse's CEO and chairman, giving them the room to stay in office for a longer period. The NSE says it is both a listed company and a licensee of the CMA and argue that the licensee part be moved away and placed under a different body. The officials want the NSE to remain as a publicly listed company only, which therefore means the terms of the CEO and chairman are at the discretion of the board.
That is a fair argument but neatly veiled for the public not to smell the stench of self-preservation underneath.
The current CEO has been at NSE helm from 2015 and his second term comes to an end in March next year whilst the chairman is also serving his second term. So, both are not eligible for renewal. If the regulator approves the amendment of this regulation, it will be morally correct that the implementation doesn’t apply to the current CEO and chair who pushed for it.
A society amends laws and regulations for posterity and not to serve personal interests. Allowing the current officeholders to renew their terms after removing the term limits will give the impression i that amendment that it was done to satisfy their selfish interests.
There are more serious challenges that I expect the NSE CEO and chair to be concerned about. One big problem the market has been struggling with is pricing inefficiency in the government bonds market because of front-running and unabated fraudulent behaviour from rogue traders mispricing government bonds to make big returns. This is easy to detect. One simply needs to look at the patterns in the prices and will note the mispricing away from the yield curve that do not draw a direct link to any current relevant information.
These rogue traders have created a market anomaly of a distorted yield curve in the government bonds market that’s negatively affecting government borrowing costs as investors price on the run papers based on prevailing market yields.
So, when rogue traders distort the yield curve, they are distorting the valuations of those government bonds, meaning some investors taking haircuts. That affects government borrowing too because investors price the run papers based on prevailing market yields. The regulator (CMA) is well aware of this front-running but has been a paper tiger not bothered to rein in these rogue traders.
The writer is an economist.
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