Photograph — Bloomberg

The Nairobi Securities Exchange (NSE) has launched an upgraded trading system that comes with new equities as part of its efforts to spur trading on the country’s bourse. Prior to the launch, NSE had secured approval from the Capital Markets Authority (CMA) early October.

According to the NSE Chief Executive, Geoffrey Odundo, the new Automated
Trading System is “more efficient, scalable and flexible” and is in line with the Exchange’s strategic objective of increasing availability and accessibility of its trading platform.

Allowing for new equities trading such as Short Selling and Day Trading, the new platform will significantly change the structure of the current trading process.

“We are excited to have an upgraded Automated Trading System that offers a more robust platform, which supports the diversification of trading securities,” said Odundo.

In addition to boosting the diversification of trading equities, the addition of the new trading options has the potential to revolutionize Kenya’s capital markets.

Short selling and day trading

Mostly found in the capital markets of developed countries, short selling is an
advanced trading strategy in finance that involves speculating on the decline in the price of a stock or other securities.

In short selling, an investor borrows stock or other assets he believes will decrease in value by a set future date. Then the investor sells the borrowed shares to buyers willing to pay the market price.

Before the borrowed shares must be returned to the lender, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. Short-sellers bet that the stock they sell will drop in price, thereby making gains on the trade.

For the lenders, who are usually long or medium-term investors such as institutional investors and high net worth individuals, the arrangement will see them lend their shares to traders at a fee. This would diversify their incomes beyond the yearly company dividends.

Meanwhile, day trading is the buying and selling of financial instruments within the same trading day or even multiple times over the course of a day with a view to taking advantage of small price moves for gains.

Brokers who trade in both capacities – short selling and day trading – with the motive of making profit are speculators.

Boosting trade activities

For Kenya, opening up its stock market to increased speculation is aimed at boosting trading activity amid falling stock prices which has characterized trading on the NSE for several years.

According to data from the Central Depository and Settlement Corporation, about 90 percent of the 1.6 million share accounts on the bourse is currently dormant and have been inactive in the past two years.

More so, data from the NSE show that the Nairobi exchange has seen its daily turnover decline by over 40 percent from Ksh608 million ($6.08 million) to Ksh361 million ($3.61 million) in the last 10 months.

“This is a very good move for the market. Investors have always made money when they buy shares and sell them off when their prices go up,” Paul Mwai, the CEO of AIB Capital Ltd told The EastAfrican.

“However, we have now opened up an opportunity for investors to make money when prices of shares decline,” he said, adding that opening up the market to more speculators will improve liquidity and enhance transparency and pricing in the market.

Among other initiatives, introducing the new trading system to attract speculators is reported to be part of the recommendations by the World Bank. The ultimate goal is to boost liquidity and spur trading in the dormant stock market.

“We expect a rise in trading activities and look forward to working together with all our stakeholders as we transition to the system,” the NSE chief added.

The new system’s functionalities are in line with international standards and best practice as envisioned in the Kenyan Capital Markets Master Plan. It was provided by a unit of the London Stock Exchange Group (LSEG) – LSEG Technology, one of the global leaders in the development of high-performance trading systems.

Comments

Elsewhere on Ventures

Triangle arrow