“Technology Strategy for The Nigerian Capital Market ”

Ade Bajomo

Executive Director | Market Operations and Technology The Nigerian Stock Exchange

September 2013

1 • Introduction – Why Change?

2 • Industry Trends

3 • Technologies for Capital Market’s Emergence

4 • Putting It Together - The Technology Architecture

5 • Impact on Market Participants

6 • Conclusion

| CONTENTS |

1. The current trading platform has reached its ‘end of life’ and will no longer be supported by its suppliers from mid 2013. It has been in use at the NSE since 1999.

2. Opportunities for automation (straight through processing) will be lost, leading to poor level of price transparency and operational efficiency for both investors and operators as activities outside of trade matching remain largely manual

3. Opportunities to scale the market with more companies, achieve $1T capitalisation and increase the retail investor base, reaching out to the rural areas will not be possible

4. The Nigerian Capital market’s aspirations to move from frontier to emerging market status, WFE membership and inclusion in the MSCI Emerging market index, all critical for attracting significant order flows and competing with the leading African (an emerging market) Exchanges, will not be achieved

5. Nigeria’s Vision 20:2020 for the capital market will not be realised and its position current as the leading capital market in West Africa jeopardised in the medium term as other Exchanges such as Ghana continue in their steady technology investments

6. Opportunities to diversify the income base that can be used to grow the Exchange (such as market data) will be lost

7. The Exchange will not have the ability to offer more products (and especially hedging products ) such as Options and Financial Futures, required for a fully functional capital market

8. The uptime and operational viability of the Exchange will be significantly impacted without investments in modern business continuity approaches, with detrimental impact on not just the market but the wider economy

Changing the experience of doing business

| Why Change? |

|

Highlights

• 2013 Est. GDP Growth – 7.1% (2012 – 6.6%)

• Inflation trending south at 11.4% (2012 - 12.1%)

• 2013 Est. MPR Rate – 12% (2012 – 12%)

• Current account surplus at 8.9% of GDP

• Stable Foreign Exchange outlook @ $1/N160

• Foreign Reserve – USD 47.63Bn (2012 – USD 44Bn)

• Improved Credit Rating (Fitch BB-/Stable, S&P B+/Stable ) amidst global sovereign downgrades

• Estimated 3rd largest global population by 2050

• $1 Trillion Capitalisation

9/16/2013 The Nigerian Stock Exchange 4

Economic Snapshot – Build for the Future|

Building for the future and to last is not an option but a necessity

|

GDP Per Capita (in USD at constant prices since 2000)

The difference 30 years make in comparative numbers

Nigeria’s GDP Per Capita outperformed China barely thirty years ago, yet China is

now miles ahead, having successfully untapped its opportunities

9/16/2013 The Nigerian Stock Exchange 5

What We Do Now Matters |

Country 1970 2012 %Change

China 122.29 2634.71 2054%

Ghana 294 402.7 37%

Kenya 291.49 478.22 64%

South Africa 3104.02 3825.09 23%

Nigeria 222.18 1452.09 554%Source: Trading Economics

| Technology: An Essential Capital Market Enabler

Moving with the times

• The Securities industry is largely driven by technology, whereby the ability to develop a focused strategy for the utilization and deployment of resources is critical.

• Support for new technology driven trading approaches is key

• Utilisation of data (including those from the Social Medium) to develop automated trading strategies and enhanced risk management is now mainstream

• Trading venues, regulators and regulated entities need to keep abreast of the trends to make markets more transparent and fairer for investors and participants

• Speed, accessibility and robustness of technology systems are now critical success factors of modern trading venues, underpinning the achievement of scale economics

• Key Industry trends include, but are not limited to the following:

– Mobile / E-trading

– Co-hosting and Co-Location

– New technology enabled trading models

– Reduction in latency and increases in order book capacity

– Market surveillance technology The Nigerian Stock Exchange 6 18-Junel-2013

| Industry Trends: The Need for Speed

Reducing the time of execution

• Low latency allows for unnoticeable delays between an input being processed and the corresponding output providing real time characteristics

Key Trending in Latency reduction

• Over the past 5 years, most execution venues have placed substantial investment into creating trading infrastructures and platforms that reduce latency, support high volume flow, and disseminate market data.

Key theme to consider: Speed and Connectivity • How does your speed of access and level of connectivity ompare to your main competitors? • Do you understand the commercial implications of not updating legacy IT systems?

350

100

5 0.9 0.01 0

100

200

300

400

2007 2008 2009 2010 2011

Late

ncy

MS

LATENCY DEVELOPMENT, 2000 to 2011

Year Latency

2000 10s

2007 350 ms

2008 100 ms

2009 5 ms

2010 <900 us

2011 <100 us

The Nigerian Stock Exchange 7 18-Junel-2013

*Source: KPMG - Winning platforms, 2012

| Industry Trends: A Race to Zero

KEY DEVELOPMENTS ORDER BOOK CAPACITY

• Requirements to act on changes in the market near real-time has led to the Race to Zero

• Market participants look to optimize the time required to access market data and initiate and execute a trade

• As network providers continue to reduce latency and increase availability, many exchanges have – in turn – optimized their order/trade and market data protocols

• This has also led to the evolution of exchanges towards the offering of trading-related IT services that facilitate automated trading and an increased focus on facilitating trading by for example allowing market participants to host physical servers in the same data center as the trading/ matching engines

• Accordingly, several exchanges have undergone substantial technology upgrades in order to increase their order book capacity measured by Orders Per Minute (OPMs) as shown in the graph to the right

30,000

30,000

100,000

120,000

250,000

410,000

500,000

1,000,000

200

1,000

20,000

15,000

30,000

3,000

18,000

38,000

0 500,000 1,000,000 1,500,000

JSE

Bombay SE

ASX Trade

Hong Kong EX

Nasdaq OMX

Tokyo SE

LSE

NYSE Euronext(US Options)

Orders Per Minute (OPM)

Before Upgrade

After Upgrade

*Source: KPMG - Winning platforms, 2012

The Nigerian Stock Exchange 8 18-Junel-2013

| Nigeria On the Road to an Emerging Market |

CRITERIA

FRONTIER

MARKET

NSE'S CURRENT

POSITION

EMERGING

MARKET

Openness to Foreign Ownership At least some Significant Significant

Ease of Capital Inflow/Outflow At least partial Significant Significant

Efficiency of the Operational

Framework Modest Modest Good & Tested

Stability of Institutional Framework Modest Modest Modest

No. of Cos. with Full Market Cap 2 / $280M 7 / $560M 3 / $560M

No. of Cos. with Float Market Cap 2 / $14.5M 4 / $280M 3 / $280M

No. of Cos. with Security Liquidity 2 / 2.5% ATVR 1 / 2.5% ATVR 3 / 15% ATVR

Repatriation of Capital and Income Modest Significant Significant

Foreign Ownership Restrictions Modest Low Low

Broker Competition To Ensure High

Quality Services Low Low Modest

• The NSE meets 7 of the 9 criteria for an Emerging Mkt

• 5m Investor Accounts (at CSCS)

• 117m Mobile Phones • 45m with Internet Access • 85m B/w ages of 15 – 64 • N3.1 Tr in Pension Assets • N10Tr in Imports for 2011 • GDP @ 6.5%+ • ASI up 30%+ YTD

As at 2012

The Nigerian Stock Exchange 9 18-Junel-2013

| Technology for Capital Markets’ Emergence |

A critical pre-requisite for frontier market emergence is enabling technology, facilitating operational efficiency within the markets and their eco-systems.

Enabling Technologies

Trading Platform

Market Database

Networks

FIX Protocol

Order Management

System

Business Continuity

End to End Process

Automation

Surveillance, Monitoring

and Capacity Planning

| Trading Platform and Connectivity |

Market Data Feed

CSD Surveillance Market

Database

Secure Network

Traders/ Market Makers

Trader Workstation

MM/Broker OMS

Post Trade Management

Trading Engine

FIX

FIX

FIX

SDK

New investor access channels

| Trading Platform |

• A high performance multi-product, multi-asset platform is an essential building block

• Highly scalable to cater for wider participation of growing middle-class and investing segment of the population

• Supports global investor participation and offers features such as direct market access and automated trading

• Architecture must support low latency and maximum system availability for users

• The trading engine, in addition to order matching, should also carry out functions such as index computation and position keeping

| Networks |

• Emerging frontier markets need to develop low latency, reliable, secure and scalable data networks that will cater for the on-going evolution of trading

• Networks must be well designed and optimised, with the ability to carry data at the highest speeds to support the high volumes of buy and sell orders generated by the trading engine

| Market Database |

• Historical data usually stored in high performance databases, separate from the core trading engine

• A ‘lean and mean’ trading engine can be maintained

Historical and Real Time

Data

• Market database essential for the provision of BI services and data products

• Helps add value to the investment decision making process of market participants

Business Intelligence

• Market data can provide an alternative source of revenue for an exchange Revenue

| Order Management System |

• Many frontier markets do not have automated interfaces between their trading platforms and order management systems – brokers are required to manually key orders into the trading system

• Automation in this area is a key requirement for a market to move from the frontier to emerging classification

• The implementation of a minimum technology standard for the broker dealer community will be an enabler for technology driven efficiency in these markets

• It will also engrain best practices in achieving improved levels of transparency and reduced order placement to execution times

| FIX Protocol |

• The Financial Information Exchange (FIX)

protocol has seen widespread adoption by the global capital market participants

• Fix Adapted for Streaming (FAST) is also an essential baseline requirements for today’s trading platforms

• FIX and FAST utilised by market data vendors and order management system providers to interface with trading engines

• Trading platform should also be upgradeable to run the Itch and Ouch protocols (where higher performance levels are required by the market)

| FIX Life Cycle|

| End to End Process Automation |

• Process automation is key to ensuring that the investments in technology and innovation are translated into a high quality service for market participants

• A continuous improvement process is

also required to update operating efficiency and add true value to the experience of market participants

• Provision of Audit Trails to track entire order management lifecycle

CONTINUOUS

PROCESS

IMPROVEMENT

| Monitoring and Capacity Planning |

• Trading activities, infrastructure and applications need to be monitored in real time to ensure and maintain high availability of systems

Real-time Surveillance and monitoring

• Diagnostic and capacity management tools provide an early warning system in the event of impending or actual problems

• Prompt alerting is key in mobilising resources quickly to resolve problems as they arise

• Tools must also provide the ability to drill down, and present arising alerts from a range of applications, hardware and networking systems via a single administrative interface

Pro-active Alerts

| Business Continuity |

• A robust business continuity plan is essential - it will ensure timely and dependable recovery of services in the event of a disaster

• The plan must ensure an adequate level of geographical dispersion from the main site, and also support smooth recovery to the backup systems in the shortest practical period of time

• Business continuity processes should be regularly tested by the Exchange and its wider eco-system of broker-dealers and key market participants

REPLICATED INFRASTRUCTURE

SERVICES FOR FAST AND RELIABLE

RECOVERY

LIVE

BACKUP

| Support for New Trading Models

Customer Driven Electronic Trading • Buyers and sellers of securities are provided with electronic access to trade in the market

by their broker dealers via tools that are easily accessible and appropriate to support the customer business. Institutional investors are provided with terminals that link up to the broker dealer order management system while retail investors are provided with access to trade via the internet using a smartphone, tablet device or a traditional computer

Direct Market Access • This refers to granting institutional investors (known as the buy side) and other traders

wishing to trade in securities access to do so directly from the information technology system of their broker-dealer firms to the Exchange’s order book, rather than the normal trading method of the buy-side companies passing their orders to the broker-dealer firms ‘ trading desk for execution. The technique is often combined with HFT

Algorithmic Trading • Algorithmic trading, also called automated trading, black-box trading, or algo trading, is

the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention

High Frequency Trading • High-frequency trading (HFT) is the use of sophisticated technological tools and

computer algorithms to rapidly trade securities (a form of Algo trading). HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second. By 2009, HFT accounted for 61% of the US trading market share, but has since reduced to 51% in 2012

The Nigerian Stock Exchange 21 18-Junel-2013

Be trained and certified to use X-STREAM

Participate in Market Readiness Tests Readiness weekends Pre Go-Live Dress Rehearsals Performance load testing

Take advantage to participate in User Acceptance Tests

Replace Dealing Workstations if not X-NET supplied

Diligent in logging any arising issues with the Helpdesk

Make investments to improve operational efficiency

Make customers aware of the benefits of X-GEN

Implement and certify your Order Management System As Early As Possible

| Must-Dos for Broker Dealers |

| What will change day 1 post go-live? |

New Trading System

Automation of Trade Data Input and Output (FIX) Through the Order Management Systems

Customer Ability to Place Orders Anywhere, Anytime

Improved Platform Stability after Bedding Down Period

Improved Market Transparency for all participants

Unparalleled Access to Market Data

| Programme Status - Countdown to Go-Live

Signoff Acceptance Testing Completed

Over 650 broker/dealers trained

230 Trading workstations installed on the floors of the Exchange

110 Trading workstations have remote trading access

Three Market Readiness Tests Completed Successfully

Four Order Management Systems have been certified

Top 20 Broker-Dealers are implementing OMS System

Workload and Confidence Level High for 30th September 2013 Go Live End-to-End testing commenced on the 11th of February 2013, this activity is scheduled to undergo several iterations, there will be simulation’s of production conditions and during this exercise all processes will be tested on an end-to-end basis e.g. Trades will be tracked from order placement to final settlement and verified in X-Stream, Market DB, Ticker Tape and the Web portal. We will also be testing all the Business processes alongside the system. We are currently on the 3rd phase of End-to-End testing where we are verifying the functionalities delivered in CR006 (Market Making) End-to-End testing phase 4, will be completed by the 24th of May after which we will embark on Market readiness tests. Key focus areas on the Program include: • Set-up of Network system (implementation) • Delivery of Workstations • Delivery of MM reports • Readiness of the Disaster recovery (DR) site

Trading Sessions

Start End Trader Allowed

MM Allowed

Participating Order Types

Participating Order Duration

Price Limit(?)

Circuit Breaker

Pre-Open

9.30 10.05 Yes No Limit

Good Till Open Good Till Date Day

+ or - 10%

-

Pre - Open Adjust 10.05 10.15 No Yes MM Quote N/A + or -

10% -

Continous Trading

10.15 14.10 Yes Yes Market Limit MM Quote Negotiated Deals Crossing Orders

Immediate Day Good Till Date Pre-Close

+ or - 10%

-

Pre-Close 14.10 14.20 Yes No Limit Good Till Date

Day + or - 10%

-

Pre -Close Adjust 14.20 14.30 No Yes MMQuote N/A + or -

10% -

Close 14.30 14.30 - - - - - -

| New Market Structure

|

1/17/2013 The Nigerian Stock Exchange 26

Impact on Exchange Participants |

• Local Brokers • Order Management Systems

• Adoption of FIX

• Implementation of Minimum Technology Standards

• Cost reduction by scaling up

• Simplicity and transparency of access by clients

• Development of New Business Strategies

• Upskilling on new products and trading techniques

• Global Brokers • Simple connections, FIX

• Easier and Faster Market Access

• Higher Profile for Nigerian Market

• High volumes/low latency

• End Users • Mobile and flexible access to trade securities

• Online/Real time price transparency

• Online Portfolio management and valuation

• Out of hours order submission

• Reach of the market regardless of location

| Impact on Eco System

Order Management System Service Provision

Market Intelligence Services

Product Development and Risk Management Services

Information Security

Infrastructure (hardware and network) services provision

Mobile Finance initiatives and integration services

New Trading Possibilities

| Improved market liquidity and depth

Modern, low- latency, high performance trading platform

Fast Remote Trading Capabilities

Wider Access to “Real Time” Data

Mass Population and International Reach

Unparalleled Automation and Connectivity

Support for latest securities trading paradigms

Improved market transparency and governance

Adherence to standards

Best in class regulatiom

Changing The Customer Experience |

| Roadmap … The journey of a thousand miles ….|

| Q & A |

QUESTIONS?

Stock Exchange House

2 - 4 Customs Street

P.O. Box 2457, Marina

Lagos Island, Lagos, Nigeria

www.nse.com.ng

Thank You

Whitepaper on the presentation available on:

: http://blogs.terrapinn.com/total-trading/2013/06/12/download-ade-bajomo-nigerian-stock-exchange-nigerian-capital-market/