Impact of stock exchange automation on volume, volatility and liquidity of stocks at Nairobi Stock Exchange (NSE).

Abstract

Exchanges automation world over are associated with changes in vanous market characteristics. These market characteristics include the market returns, volume, volatility, liquidity, bid-ask spread among others. These characteristics of stock trading are linked to expected rate of return on common stock and hence important to an investor. Trading of financial securities in Kenya started in the 1920's as a sideline business conducted by accountants, auctioneers, estate agents and lawyers, all of European origin, who met to exchange prices over a cup of tea. The trading system that was employed then was manual, first a call over system and then the open out cry system and in 2004 the CDS was launched, followed by ATS in 2005. The call over and open out cry systems of trading have great limitations in terms of the traded volumes they can handle and the speed at which trade can be executed and hence the need for automation. The objective of the study was to identify the behavior of volume, volatility and liquidity under three trading systems namely, manual trading, partial trading (CDS) and full automation (ATS) at NSE with a view to determine whether automation has affected the three market characteristics. The findings of the study revealed that automation at NSE is associated with increased volume of trading, increased volatility of quoted stocks and increased liquidity. Greater volumes of trade and volatility were noted when NSE was full automated compared to manual or partial automated systems. However though there was a noted increase in liquidity on introduction of CDS, the liquidity declined on introduction of ATS.