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NSE restates prohibition of naked securities selling

By on February 18, 2015

The Nigerian Stock Exchange (NSE) has restated the prohibition of naked short selling of  securities in the Nigerian  capital market. Naked short selling of securities is a practice of selling securities which the seller does not own and has not made arrangements to borrow such securities.
Securities  selling was introduced in 2012 along with market making and securities lending.  While market making has been active, securities lending and selling have not been as active as expected.

Also, securities selling was allowed in the market, the NSE had prohibited naked securities selling . The NSE in a new  notification  reminded  dealing members that naked short selling is strictly prohibited.

According to  the NSE,  any dealing member who violates the  rule  will be fined 10 per cent of the total transaction value.

“Naked short selling is prohibited by the Exchange. Any dealing member that engages in naked short selling shall be liable to pay a fine of  10  per cent of the total transaction value and any benefit accruing from such transaction shall be paid to the Exchange. Any dealing member involved in naked short selling more than once over a period of one year shall be classified as a serial offender and will be suspended from trading for a period to be determined by the Exchange,” the NSE said.

In a  major move to deepen the liquidity in the market, the  NSE introduced market making and securities lending in 2012.

Market making is the process whereby a broker-dealer provides continuous two-way quotes (comprising buy and sell prices and sizes) to the market for the securities that they make markets on during the trading day. One way of the two-way quotes, indicates the price and size the broker-dealer is willing to buy a particular security, called the ‘bid’ while the other way indicates the price and size he is willing to sell that same security, called the ‘ask’, or ‘offer.’ A broker-dealer licensed to execute such trades is known as a market maker.

On the other hand, securities lending is the lending of securities such as stocks and bonds by one party to another. The borrower provides acceptable collateral to the lender in the form of cash or other acceptable securities of equal but often greater value than the securities borrowed in order to protect the lender against any default by the borrower.

 

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