FINANCIAL MARKET FRICTIONS AND ITS EFFECT ON THE MONEY MARKET TRADING MECHANISM
ABSTRACT
This study focused on “Financial Market Frictions and Its Effect on the Money Market Trading Mechanism”It introduce financial frictions in a two sector model of international trade withheterogeneous agents. The level of specialization in the economy (economic development) depends on the quality of financial institutions.Underdeveloped financial markets prohibit an economy to specialize in sectorswhere finance is important. Capital flows and international trade are complements when countries differ in the degree of development of their financial sectors. Capital flows to countries with more robust financial institutions which in turn allow their economies to develop sectorsthat are financially dependent.Questionnaires, focus group discussion and interviews schedule were used in systematic arrangement and method of formulating and implementing the purpose/objectives of the study for data analysis. The total sample size for this study obtained is 375 respondents of the focal groups amounting to 71.3%.  The designs, among other things, describe a phenomenon of interest, to test the research hypothesis and provide forms of casual explanation to evaluate the objectives of interest. The conclusions drawn from this research quite explicitly show thatTrading friction induced by regulations in the stock market may reduce speculative trading activities and may help stabilize market prices and the stock market in limiting managerial risk-taking.  And also recommendation was drawn in this study.
CHAPTER ONE
INTRODUCTION
1.1    Background of The study
Transaction costs for investor trading in the U.S. stock market have declined significantly over the past 30 years: for example, the bid-ask spreads on Dow Jones stocks dropped from over 0.7% in 1980 to 0.2% in the 2000s, and the average brokerage commissions on listed stocks fell from 13 cent per share in 1980 to 4 cent per share in the 2000s.
There has been a debate over the effect of such changes on asset prices and financial stability. On the one hand, a lower transaction cost enhances trading and promotes market efficient market efficiency. On the other hand, an easy transaction makes the financial market less stable and may have a detrimental effect on the macro economy. The proponents of the “Tobin tax,” for example, tend to emphasize the latter view.
One recent development in the corporate finance literature is the emphasis on the “feedback” effect. This literature challenges the traditional view of the financial market as merely a mirror image of real economic activities, emphasizing that activities in the financial market reveal information and affect (thus “feed back into”) the behavior of firms and other economic actors. In light of this view, one natural question is: how does the decline in transaction costs in the financial market affect the real activity?
In Nigeria these objectives include achievements of domestic price stability, balance of payment equilibrium, efficiency, equitable distribution of income and economy and development.
Economy refers to the continuous increase in a country’s national income or the total volume of goods and services, a good indicator of economy is the increase in Gross National Product (GNP) over a long period of time. Economy development on the overhead implies both structural and functional transformation of all the economy indexes from a low to a high state (Siyan, 2000:150) one of the macro–economy variables of importance is the exchange rate policy country.
Exchange rate policy involves choosing where foreign transaction will take place (Obadan, 1996). Exchange rate policy is therefore a component of macro-economy management policies the monetary authorities in any given economy uses to achieve internal balance in medium run. Specifically internal balance mean the level of economy activity that is consistent with the satisfactory control of inflation. On the contrary, external or sustainable current account deficit financed on lasting basis expected capital inflow.
It is important to know that economy objectives are usually the main consideration in determining the exchange control. For instance from 1982–1983, the Nigerian currency was pegged to the British pound sterling on a 1.1 ration. Before then, the Nigerian naira has been devalued by 10%. Apart from this policy measures discussed above, the Central Bank of Nigeria (CBN) applied the basket of currencies approach from 1979 as the guide in determining the exchange rate was determined by the relative strength of the currencies of the country’s trading partner and the volume of trade with such countries. Specifically weights were attached to these countries with the American dollars and British pound sterling on the exchange rate mechanism (CBN, 1994). One of the objectives of the various macro–economy policies adopted under the Structural Adjustment Programme (SPA) in July, 1986 was to establish a realistic and sustainable exchange rate for the naira, this policy was recommended in 1986 by the International Monetary Fund (IMF). On exchange mechanism and was adopted in 1986.
The key element of Structural Adjustment Programme (SAP) was the free market determination of the naira exchange rate through an auction system.
This was the beginning of the unstable exchange rate; the government had to establish the foreign exchange market (FEM) to stabilize the exchange rate depending on the state of balance of payments, the rate of inflation, Domestic liquidity and employment. Between 1986 and 2003, the Federal Government experimented with different exchange rate policies without allowing any of them to make a remarkable impact in the economy before it was changed. This inconsistency in policies and lack of continuity in exchange rate policies aggregated unstable nature of the naira rate. (Gbosi, 1994:70).
 1.2      Statement of The Problem
This major problem which this study is designed to solve is whether the exchange rate has any bearing on Nigerians economy and development. While some Economist dispute the ability of change in the real exchange rate to improve the trade balance of developing countries (Hinkle, 1999:21) because of elasticity of their low export, others believe that structural policies could however change the long-term trends in the terms of trade and the prospects for export led. Instabilities of the foreign exchange rate are also a problem to the economy.
The following statements of the problems are:
1)    To ensure there is stable foreign exchange rate.
2)    Devaluation of naira.
3)    To ensure there is stable government policy in the country.
 1.3      Objective Of The Study
The objective of the study is to show the effect of money market trading mechanism and development of the Nigerian economy identifying the impacts of the unstable exchange rate of the naira on these major macro-economy variables would however, depend on the conditions prevailing in the economy at a given time.
The main objectives of exchange rate policy in Nigeria are:
1.    To identify the fluctuation of price in the stock market.
2.    To present the value of the domestic currency.
3.    To maintain favourable external reserve position.
4.    To ensure price stability and price levels which are consistent with those of our trading partners.
5.    To have a stable and realistic exchange rate that is in consonance with other macro-economy fundamentals.
1.4     Research Questions
1.    Does Exchange rate fluctuation effect on Nigeria economy and development?
2.    Does Price stability effect on Nigeria Stock Exchange?
3.    In what way Unstable of government policy in the country effect foreign exchange?
1.5    Research Hypothesis
Based on the objectives of the study, the following hypothesis were formulated.
1)    Ho: Price stability has no significant effect on Nigeria Stock Exchange.
Hi: Price stability has a significant effect on Nigeria Stock Exchange.
2)    Ho: Unstable of government policy in the country has no significant effect foreign exchange.
Hi: Unstable of government policy in the country has a significant effect foreign exchange.
3)    Ho: Exchange rate fluctuation has no significant effect on Nigeria economy  and development.
Hi: Exchange rate fluctuation has a significant effect on Nigerians economy and development.
1.6    Significance of The Study
The significance of this research work lies in the fact that if the cause of the unstable exchange rate of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. This is so because if the unstable exchange rate of naira is proved to be affecting the macro- economy major variables badly, including Real exchange rate, Real interest rate, inflation rate, gross domestic product and trade openness of the country, attempts should be made to stabilize the exchange rate. This is because these variables are gauge for the measurement of and development of any economy. Importantly, this study would help the government and the Central Bank of Nigeria (CBN) to identify the strength and weakness of each foreign exchange system and hence adopt the policy that suits the economy best. This will definitely enhanceand development of the economy, the study will also serve as a guide to future researchers on this subject.
1.7    Scope Of The Study
This research work is designed to cover the period 1980-2009 a period of thirty years. The scope consist of the regulatory and deregulatory exchange rate period i.e. the fixed exchange rate and the floating exchange rate period. The study is based on core macro-economy performance of Nigeria between 1980-2010 more so, it rests can core economy  and development in Nigeria for the period of thirty-one years.
1.8    Definition of Terms
Financial Market: is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products.
Stock Markets: which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.
Money Markets:which provide short term debt financing and investment.
Capital Markets: may also be divided into primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors.