Effects of Market Micro-structure on Performance of Nairobi Securities Exchange

Abstract

Market microstructure changes have received considerable attention in the recent past with concentration being on their perceived impact on stock market performance. Automation and demutualization are among the major microstructure changes that have been discussed greatly in literature. Automation of trading and settlement has been touted as one of the key initiatives critical in developing of stock markets in African. Many studies point out demutualization as a precursor to the establishment of suitable governance structures that ensures resilience and growth of the stock exchanges in the current dynamic and competitive environment. Demutualized stock exchanges are flexible in decision making and therefore able to engage in numerous investment activities. This study sought to determine the effect of demutualization and automation on stock market performance of Nairobi Securities Exchange Limited as measured by stock market returns, equity trade volumes and liquidity using monthly secondary data collected from NSE, CBK and KNBS for the period 2001-2016. The independent variables for the study were automation and demutualization of the stock exchange and they were represented by dummies that took a value of zero before the event and a value of one after the event. The control variables were average monthly inflation rate as measured by CPI, average monthly interest rates as measured by bank rates and average monthly exchange rates as measured by KSH/USD. Multivariate linear regression was employed using the Statistical Package for Social Sciences (SPSS) version 21 computer software. Results show that introduction of Automated Trading System (ATS) at the NSE led to an increase in volumes traded and improved market liquidity. This finding implies that automation improved market performance of the NSE while the impact of automation on market returns could not be established. Results on demutualization were not significant across the three regression equations and had mixed signs. Demutualization is therefore more of a governance tool and may not directly impact on market performance. The study recommends that NSE should upgrade the ATS, introduce the on-line discount trading services and ensure that intraday data on bid-ask spreads and stock prices and volumes is a priority. This study considered three aspects of the stock performance namely: stock return, trade volumes and market liquidity. Further studies could compute returns from NSE All Share Index or NSE FTSE 15 Share index and have other aspects of market performance such as volatility as the dependent variables. The study was not exhaustive of the independent variables that affect stock market performance at NSE and therefore this study recommends that future research could focus on other variables like diaspora remittances, foreign direct investments, political stability and other macro-economic variables