Will Digitalization Pay Dividends?

by Tonia Sun:

The clock had just struck 11:30 a.m., with only half an hour left before the end of the trading day. At the Uganda Securities Exchange (USE), several brokers dressed in standard red blazers milled about anxiously, tightly clutching their cell phones and eagerly anticipating a client’s call. A few glanced at a gleaming whiteboard covering two whole walls of the trading floor. There were no flashing displays or scrolling screens at this stock exchange, no high-tech algorithms or light-speed transactions. Instead, numbers and ticker symbols displayed the day’s trades and prices in dry erase marker, color-coded by bids and deals.

Ugandan brokers gather around the day's listings as a deal is made on the trading floor. (Courtesy Sarah Green)

As the minutes ticked by, ever-approaching noon and closing time, one man suddenly stepped forward. “Lower my 10,000 shares of SBU to 150,” he called out, citing the stock symbol of Stanbic Bank Uganda.

The head of clearing and settlements at the USE, a stately gentleman dressed to the nines in a pinstriped suit, looked to the number “6” pinned to the broker’s blazer to identify the brokerage firm he was representing. He immediately crossed out the previous price and wrote the new one underneath. The new price was within 10 Ugandan shillings – slightly more than half a penny in U.S. dollars – of the price offered by a buyer. The new deal went through automatically.

The USE representative wrote down the number of shares bought and its price in a column for “Deals” and shortly afterwards rang the clanking bell signaling the end of the trading day from his perch at the front of the room. The price at which the deal closed would become the next day’s market price for the company’s stock; however, the buyer and seller would not be able to complete their transaction for more than five business days. Trading on the USE is a painfully slow affair.

This scene, full of formality but low on efficiency, has been a typical of the Ugandan stock exchange for the past few years. But in the coming months, the exchange is hoping to work with the country’s Capital Markets Authority to create an electronic system of trading that would replace manual transactions on the floor and the “open-outcry” system.

“With the coming into force of the Securities Central Depository law in January 2009, settlement and clearance of securities will become electronic by the end of 2010. Automated trading will follow thereafter,” explained Harriet Kiwanuka, the Head of Research and Development for the Uganda Securities Exchange.

Many think that it’s about time. Though it has existed for over eleven years, Uganda’s securities market is chronically lagging. The trading floor is open only three mornings a week, and a mere 11 companies are listed on the exchange. Of these 11, only six are local Ugandan companies; the remaining five are cross-listed companies from Kenya that rarely see action on the trading floor. According to Kiwanuka, the switch to an electronic system would allow the USE to consolidate years of data and streamline trades, changes that many hope will help Uganda, one of the world’s most impoverished countries, develop an effective domestic securities market.

Robert Baldwin is the CEO of Crested Stocks and Securities, a brokerage firm in Uganda. In a country where his blonde hair and pale skin stand out sharply on the trading floor and in boardrooms, Baldwin’s jovial personality has helped him to adapt.

“When I first visited the trading floor in 2004, it reminded me of my mom’s elementary school classroom in Norwalk, Connecticut – about the same size, too,” he joked. However, Baldwin believes that the demand for securities will expand. “Five years ago, my partners and I believed that the nascent stock market in Uganda would be destined for bigger and better things. So far, we’ve been right.” He has little choice but to be optimistic; Baldwin recently relocated his entire family to Uganda to pursue his dream of growing his firm.

The plan: to target small shareholders, a potential pool that has not yet been tapped by most major brokerage firms, through education programs. “Each time we conduct a presentation, participants are eager to learn more about investing,” said Baldwin. “We believe that any investor, no matter how big or how small, deserves superior service and investment advice. In particular, we focus on encouraging first-time investors and smallholders to enter the market.”

But Baldwin is fighting an uphill battle. Among the majority of young, educated Ugandans – the group that Baldwin hopes to target – there is still a great deal of doubt about the stock market. Haruna Rugambwa, a student in international business at Uganda’s Makerere University, shared some practical concerns. First and foremost, the majority of Ugandans simply do not have the spare funds to invest. Second, “there’s generally a lack of awareness here about stock markets.” Finally, said Rugambwa, “investing in stocks is really, really risky. Looking at our economy, there are not very many of that type of person willing to take those risks.”

Other skeptics point to the small number of participants relative to the size of the country. In September, only 1.5 billion Ugandan shillings’ worth of trades were conducted on the market in total, which equates to slightly over a quarter million U.S. dollars. The figure is less than an average week’s turnover at the Nairobi Stock Exchange, just across the border.

Nonetheless, Baldwin remains hopeful for the future of the Ugandan stock market. Though Kenya’s economy is far more developed, Uganda could be looking at a similar upwards trajectory in the coming years if it can adapt to a new system in time. “When Nairobi went electronic in 2006 it increased trading volume by 600 percent. I’m expecting a similar increase in Uganda,” Baldwin predicted.

Kiwanuka and others involved with the Uganda Securities Exchange are similarly optimistic. Though they recognize that initially, current investors holding paper certificates for their stocks may be distrustful of and deterred by an electronic system, such a change is necessary for the market’s future growth. With this new automatic, electronic method of trading in place, the USE will be more easily accessible to non-Ugandan investors. When the transition is complete, East Africa will be one step closer to establishing an integrated securities market, which many hope will create a more stable and effective regional exchange.

The push for electronic trading at the USE may be exactly what is needed to help the market grow. Soon, orders marked with color-coded markers will become mere relics of Uganda’s financial past. But, for now, Ugandan brokers still stand anxiously at the trading floor, watching the day’s trades being written, crossed out, and erased on a gleaming white board.

Tonia Sun is a sophomore Political Science and Economics major in Morse College. She interned with Crested Stocks and Securities this past summer in Kampala, Uganda.