Safaricom’s NSE dominance extends to derivatives market

Safaricom has seen its dominance of the Nairobi Securities Exchange (NSE) extend to the recently launched derivatives market to mirror the firm’s overbearing influence in the traditional shares trading.

According to fresh data from the Capital Markets Authority (CMA), Safaricom accounted for the majority 248 contracts on offer to investors out of a possible 349 traded contracts by September 30.

Subsequently, the company dictated a lion share, 55 percent market turnover or an equivalent Ksh.6.9 million to sit ahead of the pack which was majority made up of banking stocks.

At the same time, Safaricom led by way of open interests having averaged 44 outstanding contracts in the three months review ahead of KCB Group’s mean of 20.

According to Genghis Capital Research Analyst Patrick Mumu, the extension of Safaricom’s dominance is a mere reflection of the equities market even as the recently launched market bears the brunt of underwhelming investor participation.

“Our market is generally not responsive to new innovations as has been the case with other product launches. There is a general lack of adequate investor knowledge among both retail and institutional investors,” he said.

To correct the lopsided trade in the segment, Mr. Mumu recommends for the establishment of a market maker who would come in to complement unmatched trades by investors on the NSE floor by providing for the much needed funding of contracts.

The CMA meanwhile expects the rolling out of additional single equities stock to shove up activity for the market against the heightened market concentration risk which saw the big five listed firms by market value scale their dominance of trading to a 12-month high of 71.8 percent in September.

“To diversify the derivative market, the NSE is considering increasing the number of single stock futures traded,” noted the markets regulator.

The low and concentrated investor participation in the market is against sufficient investor coverage under the Settlement Guarantee Fund (SGF).

Participating investors were well covered against the potential for losses up to 613 times, a factor backed by the low risk exposure as measured in the Gross Notional exposure average of Ksh.12.8 million in the period.

The NSE launched the derivatives market on July 4 with a means to provide for investment alternatives while allowing participants in stock trading to cover themselves against the potential for loss.

Nevertheless, the market has continued to witness difficulties entailed mainly in liquidity and investor participation.