[2008-09-01]  Botswana Stock Exchange Review
The Botswana Stock Exchange is currently a typical order driven market; which means it functions around the central book where orders are matched with the book of limit orders already posted. There are advantages and some risks associated with this system. One major risk inherent in this model is the transparency risk because lack of market making requires placing market orders as opposed to limit orders, and also the inability to execute large trades quickly due to lack of market depth.

However, according to Moemedi Malindah, a Business and Financial Investment Analyst at Fincraft, it is possible to run BSE as a combination of an order driven market and a price driven market to reduce the risk inherent in each of the two models.
He acknowledged that, as other stock markets in emerging markets, the Botswana Stock exchange is continuously challenged by untimely and inaccurate information, liquidity, internal inefficiency and informational inefficiency, but said it is assuring that BSE has taken a proactive approach in dealing with some of these issues.

Contesting Malindah’s apparent emphasis on transparency risks, the BSE Product Development Manager, Thapelo Tsheole, argues that, there are always advantages and disadvantages associated with any market types. However, what is important is for the advantages to outweigh the disadvantages or risks.”

Additionally, Tsheole stated that in the case of BSE, there is no need for market making because whilst there is matching of orders, the selling and buying of shares is done at a central place at an agreed price.

Therefore, the BSE is in the process of acquiring an automated trading system early next year to improve the present way of trading. In Tsheole’s view, the issue of transparency risk does not necessarily arise because the trading floor is a public area, meaning you can physically come and witness the selling and buying of your shares.
Internal inefficiency in stock market refers to transactional costs associated with investing. Beginning in April 2008, BSE implemented a new attractive brokerage structure - a lower rate that is negotiable with maximum plausible commission rate charged by broking firms capped at 1.85% (from 2.0%). Malindah says this initiative was commendable because it is in line with BSE motto of creating wealth for Batswana.
The new lower rate translates to higher returns for investors all else equal.

Informational inefficiency, which means prices do not adjust rapidly to new information of the prevailing market prices reflects all available information regarding the value of the asset still remains a challenge. The current website of BSE makes reference to the introduction of derivates instruments, which in the opinion of some analysts, are powerful instruments that have improved reflection of information on asset prices in many different markets and it is believed they would help the Botswana capital markets to be externally (informational) efficient. Unfortunately, however, as stated on the website, the derivatives are still far down the pipeline.

The implementation of the Central depository System, which became fully operational in May this year, is another positive initiative from the BSE as this will have a direct impact on reporting past price and volume transactions as well as supply and demand conditions, hence timely and accurate information for investors.
“The ability to buy or sell quickly at a known price requires the ability to sell the stock quickly and prices don’t change much from one transaction to the next in the absence of news because numerous buyers and sellers are willing to trade at prices above and below the current price.” This is what is known as liquidity, according to the Fincraft Financial Investment Expert.

Yet another encouraging thing in Malindah’s opinion is the recognition that liquidity as measured by turnover and no of shares traded has been improving for the past three years, “thanks to the marketing department of BSE for raising so much awareness in all parts of Botswana and increasing the amount of retail clients.”
Notwithstanding all the positives so far recorded, it is generally believed that for the BSE to attain its vision “to be the leading stock exchange in Africa” the issue of market making and increasing the depth of the market in terms of products should become one of their priorities.

In regard to increasing the depth of the market, Tsheole, posited, “A lot has been going on behind the scenes with a view to broadening our product range, and more particularly regarding bringing into exchange traded funds into the stock market.” He added, “We are so far moving in the right direction.”

Furthermore, BSE official intimated that preparations are at an advanced stage for a Securitization Conference that is scheduled for October this year.
Although, in spite of the numerous challenges concerning legalities that the product development team are confronted with in their initiatives of coming up with new products, the regulators have been commended for taking a stand of partnership with the BSE on the endeavor and not of the traditional regulator-the regulated philosophy. However, the delays do not help improve the depth of the market hence the market will not be efficient.
Another issue raised by some, perhaps most local companies in regard to listing on the BSE, is the requirements. Though, the BSE cannot operate efficiently if it does not have all the listing requirements in place, some people feel that there is a need for flexibility if BSE wants to increase the participation of companies in the local bourse.

“It is possible for the BSE to have different levels of requirements for companies to choose from,” they argue. Currently there are requirements for the main board listing and venture board listing. If companies still fail to meet those requirements, wouldn’t it be better to have another less stringent board that can be attractive to some small companies, without any fundamental bending of the rules?
Responding to the query, Tsheole intimated that a number of listing rules are being reviewed. He however maintains that the present system is not necessarily prohibitive, but added that, “regulation is a dynamic process, and that it is presently merit based than disclosure based.

Tsheole further asserted that the venture board listing requirement in the BSE are the lesser stringent listing requirements.

In the global context, corporate governance has been and will always be a thorny issue. Botswana markets are not immune to this. The Chairman’s remarks of corporate governance of the BSE as an example to listed companies, is an inspiring one. It is hoped that the BSE will operate on best corporate governance practices and will somehow see to it that the listed companies operate at the global best practices.

Source: Copyright Sunday Standard 2006