FMDQ Introduces N50 Spread, -/+5% Circuit breaker

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The Financial Markets Dealers Quotation (FMDQ) has introduced the 2-Way FX Market in an effort to enhance market stability and foster greater transparency.
This is even as the value of the Naira on the Nigerian Autonomous Foreign Exchange market (NAFEM) weakened on Friday.
At the close of business on Friday, the value of the naira was down by 5.9 per cent from N1,571 which it closed the previous day to N1,665 to the dollar with intra day trades recording a low of N1,805 and a high of N1,301.

Inspired by stock exchanges where brokers implement halts when a specific percentage is exceeded, the introduction of the 2-Way FX Market involves setting a minimum threshold. Market operators will be required to quote both their buying and selling prices with a fixed spread of N50. This mandates banks to disclose their selling price before executing a purchase, contributing to heightened transparency and equitable trading practices.
Additionally, the 2-Way FX Market incorporates a circuit breaker mechanism. By adopting a ±5 per cent band around the previous day’s NAFEX rate, this preventive measure ensures that daily exchange rate fluctuations do not surpass five per cent. The directive also specifies a standard ticket size of $100,000.
Commenting on the initiative, the head, Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi said: “in the stock exchange or stock exchanges stock brokers, there is a minimum amount and once it passes a particular percentage they can say you should stop trading on a particular shares?

“Banks need to quote how much they are buying and how much they are selling and it must be with N50 spread. In other words, you have to first quote how much you are selling before buying. Also to avoid volatility, there would be a circuit breaker that would adopt the -/+5% band around the previous day’s NAFEX meaning that the exchange should not move more than 5 per cent in a day.

“Once it is more or lower than five per cent, it will stop trading for that day. This mechanism masks the stock exchange where a share cannot gain or lose more than 10 per cent in a day. However, for this to work, you have to have a lot of buyers and a lot of sellers. But the problem is that there are a lot of buyers, not a lot of sellers.
“This is to bring a bit more transparency. But if there is not enough activity in the market and the circuit breaker stops trade, it may cause people to go outside the market to settle transactions.”