The Effect of Automation on Stock Market Efficiency: A Case of Nairobi Securities Exchange

Abstract

The automation of the Nairobi Securities Exchange (NSE) in 2006 was expected as one of its objectives to improve market efficiency. The objective of the study was to determine the effect of automation on market efficiency. This study investigated the effect of the automation on market efficiency of the Nairobi Securities Exchange (NSE) using monthly market returns from the closing NSE 20-Share index and monthly closing equity price list from 2002 to 2012. Two study periods were considered pre-automation period (January 2002 to June 2006) and post-automation period (July 2008 to December 2012). The study adopted a longitudinal research design. The firms considered were listed and had data spanning the study period. The study used secondary data in its analysis. The discussion of the effect of automation on security markets efficiency is very scanty in the literature, particularly in sub-Saharan Africa. The findings from the study will be useful to advancing knowledge in the literature on the effect of automation on security markets efficiency. Descriptive and inferential statistics were used in the study. The results indicate that the introduction of the ATS had no statistically significant effect on market efficiency at the Nairobi Securities Exchange. Overall, the results indicate that automation had not yielded the anticipated benefits in improving efficiency of the Nairobi Securities Exchange.

Keywords: Nairobi security exchange, NSE share index, market automation, market efficiency