Effects of automation of bond trading on bond market performance in the Nairobi securities exchange

Abstract

Nairobi Securities Exchange (NSE) is considered as developing securities market and for many years has faced many challenges due to its low liquidity. NSE has continued to grow and implement reforms and innovations in order to raise their levels of efficiency. Between 2002 and 2009 a series of reforms were undertaken through the market regulator-Capital Markets Authority (CMA) and the exchange itself. Whether these reforms have improved the performance of bond market still remains unknown. The aim of this study was to investigate the effect of automation of bond trading on the performance of bond market at Nairobi Securities Exchange (NSE). Specifically the study sought; to determine the effect of automated bond trading on transactions cost, trading volumes, liquidity and growth of market size at the NSE. Data collection sheet was used to collect data from the NSE database spanning from January 2005 to December 2012. The data was divided into two sub periods corresponding to the pre-automation (January 2005-December 2008) and post automation period (January 2009-December 2012). The study adopted a comparative research design. The population comprised of all firms trading on bond market at the NSE from 2005 to 2012. This study used secondary data. Secondary data that targeted bond trading between the period 1 January 2005 and 31 December 2012 was identified from the NSE bulletins. The data collected was analyzed using descriptive statistics, correlations, and linear regression analysis. The influence of bond automation trading on the transaction cost is high and significantly affects its changes. The study findings indicated that; there is significant influence of bond market automation to the performance of the listed companies at NSE. Specifically, the effect of automation on bond trading determines the changes in the cost shift; the bond trading volume and market size changes are determined by the influence of the automation effect and the changes (shifts) in the bond trading liquidity are due to the influence of bond trading automation. In reaction to the current situation, policy should be imposed governing the bond trading which shall see efficiency in bond automation and consequently increasing the income of a nation through increased collection of revenue. Government securities market development must be viewed as a dynamic process in which continued macroeconomic and financial sector stability are essential to building an efficient market and establishing the credibility of the government as an issuer of debt securities.