Traders on the FMDQ where forex is traded officially have implemented a +/-5% band around the previous day NAFEX while also caping bid/offer spread to N50.
Sources with knowledge of the matter reveal the new changes is not an FMDQ official guideline, however, they are aware of the changes being introduced by some major forex dealers including banks Some commercial bank officials also confirmed same to Nairametrics.
The actions form part of a broader set of changes in the nation’s official market for trading forex which has been plagued by forex volatility. Trading hours have also been set for 10am to 2pm from the previous 10am to 4pm.
Also introduced is a standard ticket size of $100,000 which refers to the minimum transaction size or the smallest amount that can be traded on this market. Setting a standard ticket size of $100,000 indicates that the market is targeting institutional investors or large transactions, rather than retail investors.
This is expected to enhance the market’s liquidity and ensure that significant amounts of foreign currency can be traded with relative ease, catering to the needs of large corporations and financial institutions.
Stakeholders in Nigeria’s forex market opine this is reminiscent of the market structure that existed around 2006 when over $2 million was the standard ticket size.
Another important feature introduced by the so-called dealers is a bid/offer spread of N50 which is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer).
A fixed spread of N50 suggests a controlled trading environment, which could make trading costs predictable. However, it also means traders have less flexibility to negotiate prices, which could impact the market’s adaptability to sudden changes in supply and demand.
The traders also introduced circuit breakers which are mechanisms used to temporarily halt trading on an exchange if prices hit predefined levels, while a volatility band refers to the range within which the exchange rate is allowed to fluctuate during a trading session.
The introduction of a +/- 5% band around the previous day’s NAFEX (Nigerian Autonomous Foreign Exchange Rate Fixing) rate means that the exchange rate for the day’s trading cannot deviate more than 5% from the previous day’s NAFEX rate. This is intended to prevent excessive volatility and protect the market from erratic fluctuations.
The guideline that the +/- 5% band around the previous day’s NAFEX rate can be communicated daily ahead of the market open suggests a commitment to transparency and allows market participants to prepare for the day’s trading with a clear understanding of the permitted trading range.
This is a developing story……
