Effect Of Micro structure Changes On Market Efficiency: A Case Study Of Nairobi Stock Exchange

Abstract

Mobilizing long term capital is a challenge in Africa with small capital markets. Although the evidence that long term finance influences economic growth saw a wave of capital market reform in Mid-1990s, stock markets are yet to make significant contribution to growth financing. Many stock exchanges across the world are gradually replacing their traditional physically convened markets with electronic markets. Securities markets efficiency in terms of price discovery process is necessary for the markets to contribute to wealth maximization objective of investors and economic growth. The Nairobi Securities Exchange (NSE) has also made various changes to its market microstructure, especially the introduction of an automated trading system in 2006. The main rationale behind the microstructure changes is to gain market efficiency. 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 relating to the NSE 20 Share Index for the period spanning 13 years (2001-2014) was obtained. 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 than those in the pre automation period. This higher market returns can be attributed to improved price discovery process. 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. The study recommends that the NSE and CMA should pursue full market automation by enabling online and internet securities trading and use of mobile money transfer platforms in paying for stock transactions. The study also suggests further research on specific market automations (CDS, BBO, CMS) to determine whether the results would be the same. The research could also be extended to all the individual stocks as opposed to the NSE 20 share index companies used by the study to determine whether the results would be similar .