Paradigm Shift

Efficient Stock Exchanges In Africa - Consolidation Or Proliferation

Various schools of thought have argued for and against the integration of stock exchanges. The proponents of integration argue that it would create more efficient and globally competitive bourses. On the other hand, proponents of multiple stock markets hinge their arguments on the need for competition. In the context of the small, fragmented and shallow stock exchanges in Africa, it would appear that consolidation is the answer to growth and more meaningful development of capital markets. However, it is important to present the two opposing views to this argument before drawing any useful conclusions.

In 1975, the Industrial Enterprise Review (Adeosun) Panel (IERP) was set up by the Federal Government of Nigeria to, among other things, make recommendations on the further growth and development of the Nigerian capital market. Section 34 of the Government White Paper on the 1975 IERP report said Government has decided that two exchanges should immediately be established outside Lagos and PortHarcourt. Furthermore, the 1976 Okigbo Financial Systems Review Panel (FSRP) said in Section 17 that two additional stock exchanges are envisaged in the White Paper on the report of the Industrial Enterprises Panel. In his oral evidence before the Committee, the Governor of the Central Bank argued for the independence of the three stock exchanges. However, they should develop cooperation in trading but should compete in the quality of service. Then in 1991, the Interministerial Committee on the Nigerian Capital Market recommended the establishment of more stock exchanges in Nigeria.

The last panel to work on the Nigerian capital market was the 1996 Panel on the Review of the Nigerian Capital Market (Odife Panel). The Panel, like the other three before it, recommended the establishment of more stock exchanges in addition to the Nigerian Stock Exchange in direct response to the threat of monopoly (Odife, 2000:51). The Odife Panel recommended a multi-exchange format to engender competition and more rapid development. It went further to recommend a new national stock exchange with on-line trading facilities giving simultaneous and equal access to trading to all Nigerians. That was how the Abuja Stock Exchange was created. In addition, the Panel also recommended the establishment of Capital Trade Points for new community-based financial markets for small-scale industries and medium scale enterprises in rural areas (ISA, 1999). The logic of these recommendations, according to Odife (2000:38) included :

  1. breaking the monopoly consistent with deregulation
  2. tapping constituencies hitherto untapped
  3. speeding up reform and innovation
  4. rousing the existing stock exchange from its lethargy, and
  5. promoting competition which is desirable for any growing economy

In essence, the motor driving the argument for multiple stock exchanges has been the need to avoid monopoly and its attendant consequences and to create a competitive environment which deregulation thrives on. This argument appears to be supported by the history of the establishment of multiple stock exchanges in the United States of America.

According to the New York Stock Exchange Factbook (2003), there are thirteen stock exchanges in America as follows :

  1. The New York Stock Exchange
  2. The American Stock Exchange
  3. The Midwest Stock Exchange
  4. The Pacific Stock Exchange
  5. The Philadelphia Stock Exchange
  6. The Boston Stock Exchange
  7. The Cincinnati Stock Exchange
  8. The Chicago Stock Exchange
  9. The Miami Stock Exchange
  10. The National Stock Exchange
  11. The International Stock Exchange
  12. The Spokane Stock Exchange
  13. The NASDAQ (an Over-The-Counter exchange)

In addition, the following countries had multiple stock exchanges as at 2000 :

India 23
Italy 10
Norway 10
Brazil 9
Japan 8
Germany 8
Argentina 5
France 5
Switzerland 5
Canada 5
China 4
Spain 4
NewZealand 4
Belgium 3
Chile 3
Columbia 3
Pakistan 3
Honduras 2
Venezuela 2
Philippines 2
Egypt 2
Costa Rica 2

However, as the world shrinks in terms of economic pursuits and in the drive to become bigger, stronger, sounder and more competitive globally, many countries with multiple exchanges have begun to consolidate and merge their bourses. Thus, by April 2000, the Paris, Amsterdam and Brussels stock markets merged to create Europes second largest stock exchange. Named Euronext, it trails the London Stock Exchange which, with a market capitalization of 2,947 billion Euros, is still the biggest in Europe.

The merger amongst the Paris, Amsterdam, Lisbon, Geneva and Brussels bourses brought their combined market capitalization to 2,380 billion Euros. The cost synergies from this linkage included a single trading platforma single IT systema single rule book direct access to a full range of products and services domestic-like transactions costs greater international exposure synergies passed on to members and operators leading to decrease in fees.

The London Stock Exchange said of the merger as far as we are concerned, the merger announcement between the three European bourses confirms our view that consolidation is the way forward (Vanguard, 22/3/2000:17). Similarly, the London stock exchange has been seeking an alliance with other bourses to create one of the largest stock exchanges in the world. Norex was also created from an alliance of eight exchanges based on common technology Oslo, Stockholm, Helsinki, Reyjavik, Tallin, Riga, Vilnius and Copenhagen creating the fourth largest security market in Europe. (Bocker, 2005) But even more interesting is the talk of the mega-merger amongst all of Europes stock markets.

According to Mara Schamann (2005) the integration of the South American exchanges was driven by globalization, economic integration in the Ibero-American region, growth of regional companies and the need to sustain inter-regional trade. The integration/cooperation has brought together 17 exchanges in Latin America trading a highly diversified portfolio of securities on a single platform with over 200 listed Latin American companies also listed on foreign markets.

In effect, the world is going global and the major conduits for financing this globalization are not being left out. With the perennial problems of shallowness, lack of critical mass, low turnover, paucity of tradeable securities and poor capitalization of African stock markets, it is difficult to see how a multiplicity of exchanges can impact meaningfully on African economies. For example, Johannesburg Stock Exchange with a market capitalization of about US$185 billion in 2002 accounts for over 90 per cent of the total market capitalization in the African continent, with the remaining 16 including Nigeria the second largest exchange, accounting for the rest. To effectively compete in the regional or global space, stock markets need critical mass, strength of size, alliances and huge resources that consolidation generates. A country that encourages proliferation of small, inefficient markets without scale economies whose contribution to the gross fixed capital formation is miniscule is unlikely to grow and develop as quickly as it should. It is also unlikely to attract large growth-driven foreign capital flows.

Professor Esosa Bob Osaze, Ph. D
Director, Securities and Exchange Commission (SEC)
Abuja, Nigeria.