NSE breaches fuel investor concerns

March 3, 2009
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, NAIROBI, Kenya, Mar 3 – Players in the stock market say they’re concerned over security breaches within the industry as a result of inefficient information management and slack regulations on inside trading, which has in turn encouraged fraudsters.

In the brokerage fraternity, information inefficiency is eminent due to the lack of scientific computation of data that impedes the ability to make deductive validations and provides leeway to unscrupulous traders.

“An employee, director, secretary, liquidator or a substantial shareholder who uses price-sensitive information not available to any member of the public to take an advantageous position, constitutes one as an insider trader,” described a broker, who did not wish to be named.

If no one lodges a complaint or files a case in court within six months, the Capital Markets Authority (CMA) Act ensures that the known person is not liable. This is because the CMA Act section 33 subsection 15 allows a limit of only six months, in which action can be taken.

“Once one is classified as an insider trader working for a company listed in the stock market and departs from the institution, they can no longer be held liable six months down the line,” he continued.

The source explained that the number of fraudsters is going up as a result of these placid systems, whereby inside traders can jump from one brokerage firm to another and in the end; it is the retail investors that get affected.

This has led the Kenya Association of Stockbrokers and Investment Banks (KASIB) to issue a directive saying that any departures of the key staff have to be communicated and circulated within the CMA, Nairobi Stock Exchange and also among the brokers.

James Ngunjiri of Suntra Investment Bank (Suntra) however said that this order did not take effect immediately and only in the recent five months have the corrupt trader’s names been circulated.

A case in point is the recent scandal experienced by Suntra that resulted in the departure of some of their customers.

Mr Ngunjiri was however hopeful that the move by corporate companies to issue profit warnings that are released as public information beforehand, enables the rightful determination of share prices. This, he observed, would be one way to curb this practice.

He added that the automation of the trading industry would make it possible for investors to carry out their own transactions through their cellular phones or internet similar to the New York Stock Exchange, which has improved efficiency and pricing in United States equity markets.

Mr Ngunjiri explained that: “With this kind of technology, we should be able to tell the CDSC to freeze their (investors) shares because we (brokers) really do not have to deal with them ourselves. It is only them who will be able to authorise and trade through their systems.”

Customers will have full control of their equities, time saving intervention and reduced dependency on dealers to carry out transactions for them, and as a replacement for that their stock transactions will be automatically authorised by the CDSC, he added.

“What will happen is that the person (investor) will be able to put the direct order to the automated trading system. It will be real time and you get an upfront message for example, if you want to buy a share at a certain price and the price is higher than what the market is offering, you will get an immediate response telling you the transaction is not completed,” illustrated Mr Ngunjiri.

He expressed optimism that by the end of 2010, the brokerage industry should be able to recapture the loss of investors and in turn shareholders would also gain higher returns.

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