NGX: Investible disruption and roadmap into the future

By Caesar Keluro

For Stock exchanges globally, the recovery is digital. Today’s stock exchanges should innovatively leverage data to hyper-personalize the value they offer to ecosystem partners, embracing the potential of platforms and bespoke digital infrastructures to become evolutionary attuned to the changing needs of their divergent market stakeholders. Artificial intelligence and machine learning are driving the morphing world of exchanges. Both technologies are delivering a richer client experience, predicting market trends or enabling sophisticated market surveillance.

This means that stock exchanges can now have faster, smarter and smart monitoring capabilities as a result, securing and maintaining market integrity.

A survey conducted for the World Economic Forum (2020) has shown that a large majority of players in finance worldwide (85%) already use some form of AI and a large group (65%) expects to become an adopter of AI for mass financial operations. A joint survey of the Bank of England and Financial Conduct Authority (FCA, 2019) shows that most financial firms are currently building the infrastructure to deploy large-scale AI, with 80% already using AI in some form.

In the race to bring efficiency into Nigeria Exchange Group (www.ngxgroup.com), it is critical we exploit AI as an efficiency-enhancing technology; understanding that AI is helpful in front-office activities that directly involve financial service customers (e.g., User Utilization Platform using Social Media APIs – investment management, and payment systems), as well as back-office activities (e.g., capital optimisation, risk management, and market analysis).

For the user Utilization platform, Virtual assistants or chatbots are assisting customers to interact and operate with their financial institutions smoothly, even to the extent of substituting human interaction. Chatbots, in particular, are ML algorithms relying on NLP that provide financial service users with updated information, solicited; but they are also a relevant source of additional data for AI systems, thanks to their direct interactions with customers.

A fraud palaver

Sadly, anti-money laundering has proven difficult to tackle because of scanty data available to train ML algorithms to detect illegal activities. That’s changing. There are successful applications of AI algorithms (in particular artificial neural networks (ANN), support vector machines, and random forests) that outperform classical logistic regression models (traditional models), at least when training data contains a relatively high frequency of illegal activities. With this, ML helps predict fraud by managers, for example, stock market manipulations. Totally, AI can significantly improve financial market integrity and strengthen trust, a vital ingredient of the financial sector.

Innovations in the regtech space means that NGX can standardize information collection into prespecified templates that financial institutions can populate over time with automated routines and that supervisors could access through befittingly designed API interfaces. A machine-readable regulatory handbook could enable NGX’s clients to interpret and execute regulations automatically.

However, the ascent of AI has led to the possibility to design “screening algorithms” that systematically and continuously monitor financial markets identifying risks and manipulations, with a better balance between false positive and false negative than humans. The Netherlands Bank, for example, uses automated analysis of orders and executions of banks to identify funds transferred to the same recipients via different routes in high-risk jurisdictions.

NGX’s collaboration with other monetary jurisdictions could open new possibilities. “AI screens” helps detect misconduct and frauds in stock markets. It works like this: unsupervised AI algorithms scan markets looking for general patterns. Once anomalous patterns are flagged out, supervised ML algorithms step in to predict actual risks.

Financialization of market

Emerging technologies have enabled the financial markets to become more international and integrated. That’s because technology and related organisational innovations are driving these changes; making stock exchanges to be technologically competitive through economies of scale or by redefining markets as seen by international consolidation of the securities exchanges business. This has led to the integration of settlement systems across national boundaries powered by the diffusion of ICT innovations in different areas of global and local economies.

A retail revolution

In the post-pandemic world, economic recovery will be digital and it demands bold leadership to dive into a digital future. We saw it with the arrival of bitcoin in 2008 and that same year the US Fed reinvented QE. It is time for NGX to lead us into the future: a borderless, tamperproof, and inflation resistant age. Stock exchanges are being upended by this paradigm shift. We are witnessing a seismic shift in the architecture of financial settlements as trading floors get connected to bitcoin and Ether/ERC20 nodes. The future is rapidly happening before our eyes. NGX would need a response to these seismic changes.

Hidden behind Bitcoin looms large, the boom in Decentralized Finance, payment/settlement networks outside our banking system powered by smart contracts on the Ethereum network. We have seen its staggering growth, from November 2020 to now, these networks have grown, staked and traded assets from less than $2 billion to $43 billion+, bolstered by rise in institutional staking (buying and holding) and trading of derivatives (unusually CME and Binance). Platforms such as Maker, Aave, Compound and Uniswap pay interest to stakers and settle trades and coupons.

AI is reshaping retailing as traders globally have joined the stock and crypto party in large numbers in an unprecedented manner. This is also aided by social influencers, Youtube and Reddit, with enormous impact. Day trading is the new social media network and apps are open 24/7, enabling rich interactions-trade, chat, post and trade.   

We should see DF as “investible” disruptions. We believe DeFi revolution has a more structural and measurable disruptive potential for Nigeria’s financial industry. Smart contracts built on public blockchains like Ethereum, have the potential to push NGX, our clearing houses, and all forms of financial instrument trading into the realm of instant settlement bringing dramatically lower costs to our financial services industry. But regulatory-policy innovations will have to meet DeFi in a way that advances our collective prosperity.

In all, for NGX, the key focus should be to drive Africa’s digital revolution. More importantly, it must explore AI-enabled reporting metrics that relate to our talent, culture, ESG, supply chains, cyber-attacks, and eerily- data breaches. Leveraging exponential technologies in it, NGX’s reporting around deepening liquidity measures and its green credentials will strengthen NGX, making her an attractive partner for visionaries in investible disruptions.

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Caesar Keluro, co-founder/CEO, Nanocentric Technologies Limited, leads ‘Make In West Africa’, a regional think-tank; and can be reached on +234 806 300 2817 (text only) or gurucaesar@gmail.com. Twitter:@KCaesar