New Nairobi bourse system risks ‘ghost’ shares trading

The new Nairobi Securities Exchange (NSE) trading platform has exposed brokers to penalties by allowing customers to sell shares they do not have.

The system is not aligned to the custodian Central Depository and Settlement Corporation (CDSC), meaning trading and reconciliation of shares is not streamlined. They also have separate vendors.

Before the introduction of the new system, traders needed to validate if one has the shares they were selling before they were allowed to trade.

If client A wanted to sell a million shares, if the account had 800,000 the trade would be rejected. But the new system pre-validation is removed, meaning if a client sends instruction to sell a million shares and they only have 800,000 account, you will still sell and be exposed to the shortfall.

“It is an issue for brokers because the penalties for executing a naked short are very much skewed towards the broker and all he’s doing is executing an instruction in good faith. We do not know how many shares are in a custodial client account,” said Muathi Kilonzo, director, Frontier Equity Sales.

“If it’s a retail trade we can see their holdings so this is not a problem, but if it is a big fund manager keeping custody at any bank with a custodial business we do not have any visibility,” he said.

In most situations the short will be inadvertent for a variety of reasons, such as a delay in reconciliation, but a false impression is created shares have moved. “To boost market activity and support new initiatives including short selling, the market had to support separation of trading and post trade activities through elimination of pre-validation,” said NSE.

NSE said, however, pre-validation is supported through the Broker Back Office (BBO) system for non-custodial trades and they intend to roll this out in due course.

“We are working closely with the BBO vendor (Chella Software) to have this deployed…We confirm that Delivery versus payment of all trades will continue to be achieved in line with global best practice,” the bourse said.