Stock Exchange as The Ultimate Voting Machine

ByAde Bajomo and Kenneth Ohaeri

“The stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term, the stock market behaves like a voting machine, but in the longer term, it acts like a weighing machine.’’ Benjamin Graham- Father of Value Investing

All over the world, the process of selecting leaders is as important as the citizens’ means of livelihood. This is premised on the fact that everything rises and falls on leadership. Therefore, it becomes paramount that the voting process should be transparent, fair, credible, reliable and easily accessible to those eligible to exercise it. A voting system therefore, is a process by which voters make a choice between options, often in an election or on a policy referendum. An election simply gives room for the voters to choose leaders of their choice.

Economic and Political Processes Revolve Around Good Leadership

Convincing voters to obtain their vote is the essence of a political campaign. Candidates must continue to prove tothe voters that they are capable of delivering the dividends of good leadership by matching their promises with corresponding actions and providing sufficient thought leadership manifesto that creates a viable future for the voters on economic, social and personal perspectives among others. Strategies for campaigning include, debates, advertising, theme songs, rhapsodic speeches and statistical analyses among others. Today, every word, every action and even perceived thoughts are paraded before the public. All these are done as proof to convince the electorate that they deserve their votes.

In Nigeria, the process of voting begins by registering withthe Independent National Electoral Commission (INEC)after an individual has attained the age of 18 and above. This will enable the voter to have his/her name on the register with a unique card as evidence. On the voting day, accreditation starts by 9.00am where the presiding officers from INEC validate the name of voters in the register.Voting commences at 12.pm until 4.00pm. The returning officer (INEC Official) collates the votes from the various polling units, making sure that the votes counted are valid and that all the rules guiding valid voting are duly observed before pronouncing the results.

In a similar vein, companies that are successful tend to have good leadership, who understand the markets they operate in, its wider ecosystem, can identify, recruit, motivate and retain the right people, create durable internal and external networks, empower their teams, deploy the appropriate technologies and implementprocesses that will enable their firms to achieve durable competitive advantage.

Such companies often require long term low cost funds to grow or achieve their aspirations and the owners(shareholders) and leadership may want to value theirinvestment in the firm or seek to discover its real value or price per time, or even divest to other investors. Here comes the critical role of the Stock Exchange.

Companies typically come to the Exchange (or ‘the market’ as it is often referred to colloquially), to either raiselong term funds from investors to grow their business and achieve their strategic aspirations and/or to realize the value of their assets. However, coming to the market also accrue additional benefits to the company, the most notable probably being the compliance with a higher corporate governance standard.

It is therefore required for the Exchange to provide a structure (or regulation) that allows companies (or indeed governments) to raise funds in the market and/or to realizethe market value of their investments. The Stock Exchange by virtue of its daily operations serves as a quintessential institution for a model voting machine. It is an organized and regulated financial market where securities (equities, bonds, notes, currencies, commodities or derivatives of these), are bought and sold at prices governed by the forces of demand and supply – which is effectively the totality of the vote of the investors.

The Stock Exchange is an organized market with rules, oversight and various players involved in the movement of securities. Her core function is to ensure fair and orderly trading, as well as efficient dissemination of price information for securities traded, leveraging on cutting-edge technology. It presents companies, governments and other groups with opportunities to sell (and buy) securities to the investing public. In the same way, candidates in a political process have to meet certain requirements before being cleared by INEC; the Nigerian Stock Exchange (NSE) has certain minimum requirements for admitting companies and securities to list and trade. In addition, there are post-listing requirements which the promoters of a security(issuers) to be listed must adhere to if they want to continue to be reckoned with on the daily official list of the Exchange, a report that lists all the securities, their prices and much more after each trading day.

There are many advantages for being in the league of quoted companies on an Exchange. Apart from the visibility that it offers the company, it also strengthens its corporate governance, which has been proven to enhance the capability of its leadership and the prospects of the company. Listing on the Exchange entails that the company has decided to “dance naked in the village square and wash its linen in full public glare”. The company’s statistics and profile has to be in the public domain (full disclosure) to enable investors make informed decision so as to avoid shooting in the dark. By doing so, such companies benefit by ensuring that leadership take appropriate steps to always seek to act in the best interest of its owners – the investors or shareholders.

Although some Exchanges are more rigid than others in terms of their rules, the basic post-listing requirements for all markets include – the submission of regular interimfinancial reports, audited earnings reports and other news items such as changes in board and senior management as well as price sensitive information from the company that will be of value to investors in making investment decisions in the company.

As is obtainable in all economies of the world, the Stock Market is the barometer of the economy. It measures the dynamics of economic and political interplay within the economy and a forward indicator of where the economy is headed. Most of the time, whatever direction the stock market goes, is totally dependent on the health of the various sectors of the economy that are represented by the various companies classified according to the Industries they belong. It is where investors express their emotions or reactions, or put differently, cast their vote,regarding the performance of the companies in which they have shares or stakes in. Sometimes these emotions could be speculative, personal or based on facts and figures made available by these companies as part of their statutory post listing requirements. In modern terms, investors also express their emotions and reactions on the economy of countries through the Exchanges in those countries. The Stock Exchange serves as a conduit where those emotions and sentiment are expressed. It allows investors to make informed choices and also participate in the financial achievements of the companies (and indeed countries) whose shares they have chosen to be part of, providing the channel for ease of entry or exit by the investor.

Investors make money through dividend payment, bonusshares allocation and capital appreciation of their initial investment. However, poor performance in most cases translates to downward movement in stock prices, unless the company is able to provide rational reasons for this. Investors are mostly pressured to sell their holdings, in some cases at a loss, as stock prices drift southwards, in order to ‘cut their losses’. The Reign of the Robots

In modern markets, trades are conducted electronically using computers. Almost all equity Exchanges have auctions and continuous trading sessions, where buyers enter competitive “bids” and sellers enter competitive “offers” and a matching algorithm crosses the orders based on some parameters such as price, time of order entry and quantity of the order.

For an investor to buy and sell shares in Nigeria, s/he must register with a stockbroker who in turn opens an account with the Central Securities and Clearing System (CSCS) with a unique identity. This qualifies the investor for voting, synonymous with a voter’s registration card in a political system or the PVC (Permanent Voter Card), as it is known in Nigeria.

The Automated Trading System of the Nigerian Stock Exchange, XGen could be likened to a Polling Booth withthree major components - the Trading Workstations, the Trading Engine and the Message Handling System (MHS).

In order to reduce the likelihood of human error and ensure that a large amount of orders can be processed and matched at sub second level (nanoseconds), markets often employ a number of high performance machines and associated software to carry out its processing and ensure accuracy of its operation.

The trading engine collects all the valid orders i.e. offer (sells) and bid (buys) from the floor, remote trading offices of Stockbrokers, branches of the Exchange and investors using their smartphones, tablets or computers to transact through their Stockbrokers and the orders are matched and executed following these sequence of priorities: price and time of entry algorithm, in the similitude of what is done at the Vote Collation Center of an election process, to arrive at the logical conclusion on who won the vote. This result is transmitted online, real time via financial news providers such as Bloomberg, Reuters, the Nigerian Stock Exchange website, market data vendors and the wider media. Your Vote Matters

At the end of each trading session, just like voting, the trading results of the market are made available daily on the Exchange as displayed by various indicators of which the chief is the “All Share Index” - which mirrors the direction of all prices of stocks in a market and used as a shorthand by investors to measure the performance of a stock market.

As mentioned earlier, just like the INEC is the constituted regulatory body for conducting elections, a StockExchange, being a self-regulatory organization, regulates her dealing members. INEC also has a set of rules that governs all the stakeholders - from the politician to the ordinary voter, in the same manner, the NSE has set of rules that guides all stakeholders and participants in the market. “Our word is our bond “is a market slogan often used by Stockbrokers to remind stakeholders of the virtue of integrity in the market place. In terms of discipline and enforcement, both organs have defined function lines that ensure enforcement of laid down rules. For instance, in the market and as well as in the electoral framework, there are special panels and tribunals for addressing disciplinary issues and resolving aggrieved participants. A voting system enforces rules to ensure that only valid votes are counted and aggregated to yield a final result.

Before elections, candidates of various parties are expected to go on campaigns where they unveil their manifesto to the electorate - publicly disseminating their individual scorecard in facts and figures. In the same manner, all listed companies must submit to the Exchange all material facts, financials, forecast and other news like facts behind their offers for transmission to the investing public to enable them make informed decisions on whether to invest or divest from the security. All companies are also mandated to disclose their security trading policy indicating the close period by which the related parties are precluded from trading in the shares of their company. This measure is to ensure information equity and prevent insider dealings.