Day Trading implementation: A first in East Africa
Author: Moses Njuguna – Vice President, Research, EFG Hermes Kenya
On the 22nd of November 2021, the roll out of Day Trading went live on the Nairobi Securities Exchange (NSE), as part of its strategy to enhance market liquidity. The NSE received regulatory approval from the Capital Markets Authority (CMA) on the 26th of October 2021. This roll out has come on the back of investment in new technology (trading system) in October 2019 by the NSE to enable the separation of the trading and posting activities that will support introduction of more products such as Covered Short Selling, in addition to Day Trading. Furthermore, as a means to complement this milestone, the NSE Board approved an incentive structure whereby investors who participate in Day Trading will receive a discount on the second leg of the transaction at 0.114% (5% discount) for the NSE levy. This is part of NSE’s 2020-2024 strategy to deepen the Kenyan Capital markets.
So, what is Day Trading? It is the purchasing and selling (or vice versa) of the same security within a single day, trading session or multiple times a day. Day Trading is very popular in the developed world and can be traced back to 1867, way before the emergence and rise of computers or the internet, as the telegraph communication technology was used to create the first ticker tape.
Despite this, Day Trading gained popularity in 1975 post the deregulation of commissions by the US Securities and Exchange Commission (SEC) that declared fixed commission rates as illegal leading to significant declines in commissions. Today, most orders or trading platforms in the US are commission-free e.g. Robinhood. Day Traders are mainly individuals, not institutional investors, assumed to be well-informed to undertake such trades based on identification of material information that will move the stock. Additionally, they can use leverage to capitalize on small price movements that occur in highly liquid stocks.
We applaud the NSE’s keenness to introduce new products as a means to deepen the local capital markets and as an industry player, we are eager to aid in developing our markets. Day Trading is driven by informed investors in a low cost environment in the developed world, as highlighted above. In Kenya, the current broker commission rates are negotiable with a maximum of 1.76% applicable to amounts up to KES100,000 (cUS$885) and 1.36% ceiling on amounts above KES100,000 (approx. US$885), according to the NSE. We present the costs incurred when trading on the NSE below:
|Trades below KES100,000||Trades above KES100,000|
|NSE Investor Compensation Fund||0.01%||0.01%|
|CMA Investor Compensation Fund||0.01%||0.01%|
*Additional charges of KES2 stamp duty for every KES10,000 traded and 16% VAT on broker commission.
We provide the following as an example of how Day Trading works:
Assume a trader buys 100 shares in Safaricom at KES30/share at 10am based on some material information (e.g. earnings results), incurring a total outlay of KES3,073.45 that constitutes KES3,000 (to purchase the 100 shares) and KES73.45 (costs associated with the purchase).
During the day, the share price increases to KES33 (10% increase), at which point the trader decides to sell the shares earning KES3,221.35 (KES3,300 less KES78.65 in costs).
The net profit for the trader is KES137.90. The movement in share price needs to cover the transaction costs incurred for it to be profitable.