The Effect of Automation on Trading Volumes of Listed Companies at the Nairobi Securities Exchange, Kenya

Abstract

Evidence from around the world indicates massive percentage of stock exchanges adapting electronic trading platforms and a prediction that this adapting trends will continue. Institutional investors prefer speed brought by technology as opposed to price preferred by retail traders who prefer market makers and floor trading. Technology leads to reduction in cost, transparency, market volatility and liquidity, internationalization of trading and settlement systems. There has been a reverse reaction particularly due to the fact that most of the trading has a lot of anonymity and elimination of market players which have a key role in price formation. This paper examines the effect of automation on trading volume of companies based on a study of companies listed on the Nairobi Securities Exchange. The study was a quantitative case study. A total of 41 companies were examined for periods between year 2003 and 2009. Electronic trading was introduced in 2006; therefore, in order to ascertain the cause-effect relationship, the study took three years behind and three years ahead in order to eliminate any season-ability effects. The results showed that automation increased volume of companies’ equities traded during these periods. However, few companies showed that there was no effect on the companies’ equity volumes traded, which may have been caused by other factors, including either organizational, macro or micro economic and therefore unrelated to the system introduced. It was thus recommended that in the process of demutualization, the NSE should consider allowance for further study on the goings-on at the NSE by allowing students and scholars to obtain data free of charge or at a significantly nominal fee. The study is important as it appreciates and underscores the effect of continued change in technology is having on the mobilization of resources in stock and securities exchanges in Kenya and around the world.

Keywords: Electronic Trading, Nairobi Securities Exchange