Impact of Microstructure: Changes on Market Efficiency at the Nairobi Securities Exchange
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Date
2013-08-26
Authors
Agatha, Nabwire Okumu
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Abstract
Of recent, advances in electronic communications have played an increasing role in changing the
microstructure of financial markets. Many stock exchanges across the world are gradually
replacing their traditional physically convened markets with electronic markets. For securities
markets to contribute to wealth maximization objective of investors and economic growth, they
need to be efficient in terms of securities' price discovery process. The Nairobi Securities
Exchange (NSE) has therefore made various changes to its market microstructure, especially the
introduction of an automated trading system. The main rationale behind the microstructure
changes is to gain market efficie~cy. Information is however lacking on how such changes have
affected the informational efficiency of the Exchange. This study tried to determine whether the
introduction of the microstructure changes had improved the informational efficiency of the
securities market. Using a data collection sheet, secondary data was obtained from the NSE"s
authorized data vender (Synergy Ltd.) relating to the NSE 20 Share Index for the period
spanning 12 years (2000-2012). 'The data was analysed using non parametric approaches to
measure market efficiency before and after market automation. The results indicate that mean
market returns in the post automation period were higher and more volatile than those in the pre
automation period. This higher market returns can be attributed to improved price discovery
process, while the higher volatility may be due to changes in market microstructure through the
trading system. The results from normality' tests show that . market returns are not normally "
distributed in both the periods. In addition, the 'runs test results reveals that market returns are
more random in the period following automation than the prior period, implying that the market
has improved in efficiency. The general. conclusion of the study is that introduction of
automation in the Kenyan securities market has led to improved market efficiency, providing
support for the adaptive market hypothesis. The findings of this study are of importance for
policy making, especially interested in improving the efficiency of the Kenyan securities market.
The study recommends that the NSE and CMA should consider pursuing full market automation
by enabling online and internet securities trading and use of mobile money transfer platforms in
paying for stock transactions, in addition to the adoption of a hybrid trading system - both call
and continuous trading system - to enhance liquidity and transparency in trading.
Description
HG 4636 .K4O52