ABSTRACT
The automation of the Nairobi Stock Exchange (NSE) in 2006 was expected as part of its objectives to improve the performance of the market. This study investigated the effect of the automation on stock market capitalization, liquidity, efficiency, returns and volatility of the Nairobi Securities Exchange (NSE). Two study periods were considered pre-automation period (January 2002 to June 2006) and post-automation period (July 2008 to December 2012). This study therefore provided information valuable to the existing and potential investors in evaluating their investment positions. The study is of use to scholars through contribution to advance knowledge and research programs in finance and financial markets. The information from the study is valuable for policy, legal framework and stock market development to government and pseudo government bodies. Additionally it provides the institutions with an external audit assessment of the performance of NSE under automation regime. The study adopted a longitudinal research design and considered data on monthly returns, prices, volumes and monthly/quarterly GDP on 37 NSE listed firms from January 2002 to December 2012. The listed firms had data spanning the study period. The study used secondary data in its analysis. Descriptive and inferential statistics were used for analysis. The first objective was analyzed using a chi-square test and paired t-test, the second objective were analysed using a chi-square test, paired t-test and Wilcoxon signed rank test. The third Objective was analysed using the Wilcoxon signed rank test and t-test. A chi-square test and t-test were used to analyse objectives four and five. The results indicated that of automation of the NSE had a significant positive effect on market size, had a significant negative effect on market liquidity, and had no significant effect on market returns, market efficiency and price volatility at the NSE.
CHAPTER ONE
INTRODUCTION
Background of the Study
Security markets/exchanges in the world individually and collectively play a critical role in the most national economies. The main aim of a security exchange/market is to provide facilities for trade of company stocks and other financial instruments. Security exchanges have always been found in central locations for ease record of transactions. Nowadays, modern exchange stock markets are electronic networks with the evolution of information and communication technology infrastructures, which gives them speedy and less costly transactions (Helen, Hawkins and Sato, 1997).
The role played by stock exchanges has remarkably transformed over the last couple of decades due to the increasing and effective role information and communication technology platforms play. Emerging markets improved their microstructures by adopting electronic trading in order to take advantage of existing technology such as Tunisia in 1996 and Jordan in 2000 (Sioud and Hamied, 2003). Introduction of fully automated electronic trading systems, is one of the of six capital market-specific and related reforms among them stock market liberalization, enforcement of insider trading laws, privatization programs, structural pension reform, and institutional reform (de la Torre, Gozzi, and Schmukler, 2006). Security exchange automation started in the early 1970s and the transaction of securities became electronically traded through the support of information and communication technology (Jain, 2005).
Automation of the trading system usually either precedes or is preceded by the adoption of a Central Depository System (CDS) (Yartey and Adjasi, 2007). Capital markets automation does not only benefit one of the players of the financial trading game, but also all the players in the sector gain from such technological breakthrough. After the automation, investors were not entitled to go and deal directly with stock exchanges; they did not have to go to a stock broker’s office or deal with the hassles of calling him/her on the phone. Initially, investors had to compete for the broker’s time through regular and continuous access. The application of information technology allowed the investor to reach the information he/she requires any time anywhere.
Since its inception in 1954 as the Nairobi Stock Exchange, the Nairobi Securities Exchange Ltd, which was initially operating based on the call-over system, facilitates trade in shares on the trading floor of the Exchange through the Automated Trading System (ATS), which was introduced in September, 2006 prior to installation of the CDS in 2004 (NSE, 2013).
In recent comparable studies on African a stock markets the low turnover performance in African stock markets and specifically Kenya has been partly attributable to the existence of manual systems. Automation has been touted as one of the policies on how to promote the development of African stock markets. Automation is expected to reduce the costs and inefficiencies associated with manual systems increases trading activity, improving market transparency and liquidity in the stock markets by speeding up operations (Capital Markets Authority, 2010).
Benimadhu (2003) indicates that exchange specific issues affecting stock markets in Africa are low level of liquidity, few listed companies and the small size of the exchange as well as efficiency. The study will assume that the stock exchanges in Africa face the same challenges. Policy options for promoting the development of the stock markets in Africa have been discussed (Yartey and Adjasi, 2007). To address the challenges of stock exchanges in Africa, they recommended robust electronic trading systems and central depository systems as being very crucial. The performance Stock markets are influenced by a number of factors notably the activities of governments and the general performance of the economy. There is a direct correlation between the level of development of a nation’s capital market and her overall social and economic development (Okereke-Onyiuke, 2000). There is therefore, the need for a fast growing capital market, through technological innovation so as to facilitate the speedy growth and development of an economy. Since the main objective of automation is to create a well- functioning stock market, automation can have positive effects on market microstructure-related characteristics of volume and volatility. Automated exchanges can be deeper and more liquid than open outcry exchanges (Kibuthu, 2005).
The Stock Exchange of Mauritius (SEM) (2004) identified the operational advantages derivable from automation and the application of the automated trading system (ATS) as; electronic matching of orders, internet trading facilities, enhancing internationalization of the stock market’ multiple prices for an order, quick order execution prices and volume levels available in real time. Automation also improved market data or information, online report of prices, higher volume of trade and index, online corporate reporting, transparency of dealings and fairness in establishing order priority. Conceptually, an automated stock market will ensure automatic monitor and a user friendly stock market. All this operational advantages of automation were to translate into improved market performance measurable in terms of market liquidity, volatility, size and efficiency.
The performance of a stock market of an economy is of interest to various parties including investors, capital markets, the stock exchange and government among others. There is evidence that stock markets promote economic growth in Africa (Yartey and Adjasi, 2007). They find that stock markets contribute to financing corporate investments and growth of listed firms in Africa i.e. stock markets impact aggregate economic performance through corporate financing.
Statement of the Problem
There has been an upward trend in securities market automation in Sub-Saharan Africa in the last two decades (Senbet & Otchere, 2008). Complete automation of the market microstructure has been advanced one of the Policies for building capacities of African Securities Markets and a solution to the recurrent problems in stock market performance (Capital Markets Authority, 2010). African stock markets are known to be illiquid and characterized by thin trading (Mlambo and Biekpe, 2005). NSE is not an exception. The Kenyan market had an upsurge in activity since 1993 due to economic reform, privatization, and relaxation of restrictions on foreign investors and of exchange controls. However, implementation of the economic reform programme has been inconsistent and political problems remain, leading to market volatility, especially in dollar terms and liquidity has remained low throughout (Jefferis and Smith, 2005). The automation of NSE was a key to achieving enhanced operational efficiency, transparency, reduced cost of doing business, and enhanced market integrity and investor confidence (Capital Markets Authority, 2007). Higher volatility in stock markets in developing countries reduces the efficiency in allocating investment resources (Yartey & Adjasi, 2007). Low liquidity should be of great concern to Africa as market liquidity is a vital channel for linking stock market development with economic performance (Capital Markets Authority, 2010). Liquidity induces firms to list on their exchange, as it is a determinant of their cost of capital and their decision about the optimal capital structure (Gunther, 2007). Studies by Okumu (2013), and Naidu and Rozeff (1994) show an improved market efficiency and a more volatile market, (Benouda and Mezzez (2003) show an improvement in the liquidity of shares, decreased returns and no chnage on volatility or efficiency as well as Mensah, Pomaa-Berko and Adom (2012) finding no change in the efficiency of the exchange following automation of the exchange. In view of this, there was need to determine the performance of NSE under the automation regime. Automation was deemed to influence market performance positively and thus enhancing effective and efficient resource mobilization and allocation in the Kenyan economy thus affecting economic growth. The study sought to determine the effect of automation on the performance of NSE.
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Item Type: Kenyan Topic | Size: 86 pages | Chapters: 1-5
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