One of the fundamental pillars of a well-built securities exchange is a strong and efficient regulatory organ. This helps build investor confidence, ensure security of  investment and punish market players that do not abide by regulations that promote a free market environment.

Kenya’s Nairobi Stocks Exchange (NSE) has witnessed a surge of rogue stockbrokers. The most recent example is the Nyaga Stock Brokers (which was marred in allegations of unauthorized trading in client’s shares) and Francis Thuo Stocks brokerage firm that went down in similar circumstances a year ago. Despite having a CMA that claims to be functional, the perpetrators of these criminal activities have neither been charged in a court of law nor investigated. Instead, affected clients were quickly compensated and the matter swept below the carpet in both cases.

Clearly, there are fishy activities in the capital market that beg investigation. When Francis Thuo Stock Brokers were suspended in 2007, several complaints were raised to the CMA about Nyaga Stock Brokers, but nothing was done. When the story finally appeared in the local dailies early this month, the NSE feigned surprise and moved quickly to create a Ksh.100 million fund to help affected clients. This happened amidst investigations on the stockbrokers’ conduct.

Nyaga Stocks Brokers should have been suspended immediately, since their operating capital has not only been in the negative but they have been using gains made from illegal trade in clients’ shares to prop up their operating capital. The preferential treatment accorded to this criminal firm is an abuse of a free and efficient market. A market that has a turnover of over Ksh.100 billion per year should be well regulated by a strong, independent and decisive capital markets regulator to avoid manipulations and subsidizing of failure being witnessing at the NSE.

The capital markets regulator can easily be equated to the Central bank in terms of mandate and duty. While the Central Bank of Kenya (CBK) is trying to ensure that the activities of commercial banks and the monetary policy are under constant check, the CMA is trying as much as it can to maintain the status quo, in this case rogue broker are left to rule the market with their ever-present power plays and manipulations.

An integrated robust regulator will encourage a saving and investing culture among Kenyans. It will also create the much required confidence in both foreign and local investors at this time when Kenya is facing a lot of negative publicity from the post election violence. In the absence of a strong body, then the country should be prepared for a capital flight to other efficient and better frontier markets.

The CMA is to blame for our underdeveloped capital market. When the electronic trading system was introduced at the NSE, the CMA was quick to point out how this would help efficiently monitor the transaction and audit activities of brokers. But this never came to be. Instead it opened up a new frontier for rogue brokers to engage in illegal trading of clients’ shares without their authorization with unabated impunity.

It is sad that the number of stock brokerage players at the NSE has remained 18 since the NSE was founded in 1950. The recent entry of Renaissance capital Ltd. only replaced the ill-fated Francis Thuo. This leaves very small room for competition, creating a cartel of few players who decide on who joins the market and how the market is regulated. This has led to the formation of numerous stocks agents that charge exorbitant fees and provide very unprofessional services to their clients. The cartels create a perfect environment for market manipulation for the benefit of the cartel members.

Investment is not static. Market regulations need to be dynamic and constantly reviewed to ensure that investors are protected from imminent mal-practice from the industry players. If the country hopes to achieve the 2030 vision, then it’s obliged to have an independent robust CMA that will ensure a free and efficient capitals market.