The effects of market microstructure changes on performance: A case of automation of Nairobi Stock Exchange

Abstract

The aim of this study was to assess the improvement in functioning of the Nairobi Stock Exchange (NSE) following the implementation of new technology and automation of the trading system. The market had previously been operating on floor based trading system until 11 September, 2006, when it was automated. The study used historical market data. Return and volume residues and turnover ratios were calculated within the event window period of 31 days. The analysis was done by comparing the mean and turnover ratio before and after introduction of automated trading system. The market was separated between Main Investments Market Segments (MIMS) and Alternative Investments Market Segments (AIMS). The research found out that there exist no significant difference in terms of returns, volumes, and liquidity before and after automation. The research therefore concluded that the effect of automation has not been factored in the market. In conclusion therefore, the failure by NSE automation to address the interest of the investors of transparency and immediacy raises concern as to the benefits of micro structure reforms within the short term.