CHANGING TRENDS IN STOCK EXCHANGE AND CAPITAL MARKET DEVELOPMENT: LESSONS FOR AFRICA
by Chief Dennis O. Odife
(Article Reference: Document No.13, Chapter 1, November 2000)

Summary:

• Abstract
• Introduction
• Developments in Africa
• Recent Trends Worldwide
• Distribution of Stock Exchanges
• Ownership Challenges and Regulation
• New Role in Economic Growth
• Financing African Economies
• Lessons for Africa
• The Entrepreneurship Imperative
• National Economic and Financial Policies

---

  ABSTRACT - The state and extent of stock exchange and capital market development in sub-Saharan African have come under scrutiny arising from increased global interest in emerging markets. Recent changes in stock exchange and capital market development all over the world and especially in the emerging economies of Eastern Europe contain lessons, which African nations need to imbibe for their benefit. These changes are in the area of ownership and operation of stock exchanges, distribution of stock exchanges worldwide, trends towards alliances between stock exchanges in Europe, and in economic literature concerning economic growth. This paper examines some of these changes and suggests new directions for African economies in their quest for more rapid and broad based sustainable economic development.

INTRODUCTION - The classic view of the stock exchange is that of a club or association formed by brokers. On being licensed by the state or an agency thereof responsible for such matters, the association receives a monopoly right to operate markets for admitting securities to listing, for dealing in securities, stocks and shares so listed, and for regulating the conduct of their members.

Stock exchanges were expected to operate in the national interest and enjoyed their monopoly only so long as they operated at all times as such. The exchange regulated itself and its members and was truly a self-regulatory organization. "Ownership" of the exchange was in the form of membership rights to trading and participation in a select, exclusive and potentially lucrative business. To be a member of this elite club, that is to be a stockbroker, was a lifetime ambition and a guarantee [almost] of success in life. In an age of regulation stock exchange dealing licenses were sought after almost as much as import licenses. Assured of success in life and dealing exclusively with wealthy clientele, the word of the broker was his bond and he remained at all times an epitome of respectability.

The development of stock exchanges followed logically from the discovery of the joint stock company as an instrument for carrying on commerce and for sharing the risks of enterprise. The stock exchange facilitates the refinancing and perpetuation of joint stock companies which no longer need to be dissolved after one venture, no matter how successful or disastrous. The resulting framework for the orderly exchange of securities enabled those wishing to join the company to do so and those wishing to leave to do so as well. The pricing mechanism ensured that joiners and leavers could do so at prices as much as possible determined on basis understood by all. The buyer does not need to know the seller, nor does the business of the company need to be interrupted for this exchange to be consummated.

In nearly every country of the world where there are stock exchanges, there have been occasional deviations from this ideal, occasional market failures, crashes or scams. In each case, the markets quickly rise up to the occasion, and right these wrongs with the help of their supervisors thus restoring confidence in the integrity of the market and its efficacy as an economic instrument. It was never always exactly agreed what the instrument was to achieve, whether merely to serve as a trading platform, to provide liquidity or both, but the health of the stock market, epitomized by the market index appeared to mirror the health of the economy, or even to serve as a surrogate for it.

That is the theory, and to a large extent the practice as well. But that is not exactly how stock exchanges developed in the most advanced nations of the world from which the rest of the world is obliged to learn.

We have it on the authority of Michie R C, (1967), that

"…Until the mid-19th Century, the London Stock Exchange was largely occupied in providing a market for government securities, mainly those issued by the British government…………….For example, of the (STG) 1.3 billion in securities known in the London market in 1840, only 11 per cent had not been issued by governments, and, of that, much consisted of such quasi-government organizations as …"

The pattern differed somewhat in the United States perhaps largely on account perhaps of the size and diversity of that country. As Michie R C (1967) has it,

"…During the nineteenth century approximately 250 different stock exchanges were formed in the United States, with all major centers of population coming to possess at least one."

Though most of these stock exchanges died in the speculative bubbles of the period the breadth of participation, which it generated, cannot be wished away. By 1914 however, the New York Stock Exchange was responsible for nearly 45% of the trading volume in the country, larger than its nearest rival, the Boston Exchange by at lest four times in equities and nearly 8 times in bond trading. Overall, as in the UK, bonds again accounted for over 65% of the securities listed. Many of the exchanges that survived in the United States specialized in particular securities or securities related to specific commodities, but in time New York came to dominate them all and also to become the preferred exchange by international investors.

European stock exchanges may not be as famous as those of the UK or the USA, but they have been quite busy as well. In every country there are several stock exchanges, catering to rural or other regional interests in addition to the main stock exchange in the capital. Whether in Italy, Germany, France or Switzerland, the pattern is the same. In the UK the number of exchanges has narrowed from over twelve several years ago to two or three at present.

Among developing nations India currently leads in stock exchange development not only in terms of number but also in variety. Following the 'PHERWANI REPORT' a few years ago, the Reserve Bank of India (RBI), the nation's central bank encouraged a number of development finance institutions to establish the National Stock Exchange of India at Mumbai (NSEI). They duly established the exchange with sophisticated electronic networks with technical assistance from the Tata Consultancy of Bangalore, also Indian, and one of the largest software houses in the world. India had over twenty other stock exchanges including the over 100 years old Bombay stock exchange, but in a few short years, the NSEI became the leading stock exchange in India with a depository acceptable to the SEC of the USA, making it one of the most modern stock exchanges in the world.

Another nation that has used the multi stock exchange format to drive development is Argentina, with over twenty stock exchanges.

>> continuation: Developments in Africa