News Column

Uganda Exchange to Get Rival

August 11, 2014

The Uganda Securities Exchange (USE) has for long tinkered with the idea of introducing online securities trading.

Now, there is a parallel market in the offing that could shift the market dynamics with the possibility of a friendlier mode of trading.

ALT Xchange Ltd (ALTX Uganda) recently announced its intention to operate a securities and derivatives market, initially in Uganda, to service the East African region. ALTX Uganda will be a wholly owned subsidiary of the Mauritius-based ALTX Africa Group Ltd, and has already received approval from the Capital Markets Authority of Uganda to operate a securities exchange in Uganda.

Joseph Kitamirike, who incidentally happens to be the most recent Chief Executive Officer of the USE is the CEO of ALTX Uganda.

The USE has for long been stuck on equities and bonds and ALTX now offers alternative investment options that the USE was taking long to adopt.

But are Ugandan investors ready for such a market?

"If he pioneers other instruments like derivative and currency features, then he can start by target marketing to a certain class of elite persons and once they adopt, the ordinary Ugandan will be convinced," says Innocent Obilil, a stock market expert in data vending.

ALTX intends to develop a pan African footprint, providing a set of additional operating exchanges to facilitate both trading and clearing across the continent.

At the end of last week, the USE announced that starting today (Monday August 11, 2014) the bourse is amending its dealing spread sheets.

"In a bid to boost market activity and liquidity at the bourse; the Governing Council of the Uganda Securities Exchange and Capital Markets Authority have amended the dealing spread from 5 UGX to 1 UGX," read a communication from the USE signed by Innocent Dankaine, the acting Chief Executive.

Towards the close of last year, the USE said it was looking for a consultant to review its current rules by the year's end, a move that would apparently pave way for it to demutualise and become a self-regulating organisation.

Demutualisation would see the bourse go from being a member-owned organisation to a shareholder-owned company. The process would eventually see the current members of the securities exchange sell their shares to new shareholders.

This review of the Kampala bourse's rules according to management will enable it introduce new products as well as adopt an automated trading system.

Apparently, this system will allow brokers to trade from their offices instead of physically going to the trading floor as has been the case.

Currently, the USE and Rwanda Securities Exchange (RSE) are the only bourses in East Africa that are using the open outcry method for trading.

In June last year, the Dar es Salaam Stock Exchange (DSE) said that it had deployed a wide area network (WAN) that allows brokers to trade from their offices instead of physically going to the trading floor. The WAN took over from a local area network (LAN) which had replaced the open outcry system that had been in place since the establishment of the market.

By operating a derivatives market, ALTX will without a doubt send cold chills down the spines of the USE management as investors could be lured the other way. This will then worsen the already constrained liquidity positions.

A derivative is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties and its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies among others. Most derivatives are characterized by high leverage.

Putting this into context, a wheat farmer and a miller could for instance sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat.

However, there is still the risk that no wheat will be available because of events unspecified by the contract, such as the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counter-party risk. Therefore, derivatives are generally used as an instrument to hedge against risk, but can also be used for speculative purposes.

Why? "Ugandans look up to certain persons when making business decisions; the likes of Sudhir (Ruparelia), Bitature (Patrick). So if they see such people succeed in making money, then they will all jump into the band wagon and participate," he adds.

He cites the example of American Billionaire, Warren Buffet who refused to buy Facebook shares claiming it (Facebook) wasn't worth investing in because it was not profitable.

"A number of people did not invest in Facebook for this reason," Obilil adds.

Joseph Kitamirike told East African Business Week in an interview that ALTX will majorly focus on infrastructure because that is where government's focus is on currently.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

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