Exchange Automation and Adaptive Efficiency at the Kenyan Securities Market

Samuel O Onyuma

doi:10.7176/ejbm/12-15-06

Abstract

Developments in electronic trading has played an increasing role in changing the microstructure of securities markets. Worldwide, securities exchanges are gradually replacing their traditional physically convened markets with electronic markets. In order to contribute to wealth maximization objective of investors and economic growth, securities markets need to be efficient in terms of price discovery process. The Nairobi Securities Exchange has automated it operations by installing an automated trading and depository systems to improve its efficiency. Information is however lacking on how these changes have affected the informational efficiency of the Exchange. This study tried to determine whether the automation of the Exchange had improved its informational efficiency. Using secondary data collected from the Exchange on share prices for computing an All Share Index between 1994 and 2019, non-parametric approaches were used to measure market efficiency before and after market automation. The results show that market returns in the post-automation period were higher and more volatile than those in the pre-automation period. The higher returns can be attributed to improved price discovery process, while the higher volatility may be due to changes in market microstructure through use of electronic systems. While Normality tests indicate that returns are not normally distributed in both the periods, Runs test results reveal that returns are more random in the period following automation than the prior period, implying that the market has improved in efficiency. The introduction of automation in the Kenyan securities market has thus led to improved market efficiency, providing support for the adaptive market hypothesis. The Exchange 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 margin trading and a hybrid trading system (call and continuous) – to enhance liquidity and transparency in trading. Keywords : Automated Trading System, Central Depository System, Adaptive Market Efficiency, Market Microstructure, Nairobi Securities Exchange. JEL Classification : G14; G15 DOI: 10.7176/EJBM/12-15-06 Publication date: May 31 st 2020

Highlights

Securities markets enable firms to raise finance, while ensuring efficient capital allocation in an economy
Conclusions & Policy Prescription On the question whether market automations has had an impact on market efficiency in Kenya, the results indicate that mean market returns in the post market automation period were higher and more volatile than those in the premarket 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 – the trading system

Summary

Introduction

Securities markets enable firms to raise finance, while ensuring efficient capital allocation in an economy. They contribute to price discovery, provide liquidity, assist in risk transfer, facilitate corporate governance, and a measure of company performance. The most efficient market is one in which prices are completely random and unpredictable. Until the 1970s, securities markets were believed to be informational efficient until market anomalies started to be documented. These anomalies seemed to be at odds with the efficient markets theory (EMT) and led to the emergence of behavioural finance. According to the proponents of behavioural finance, markets are not absolutely efficient as portrayed by the EMT but rather relatively efficient (Chuvakhin, 2000)

Methods

Findings

Discussion

Conclusion