Once, I had an opportunity to visit the Nairobi Stock Exchange (NSE) to see how the trading of shares took place. My anticipation to learn a thing or two was instantly killed by the shouting floor traders in red jackets. I wondered why a very fine place could not transact in an "organized" manner.
This, as I came to understand, was the norm when the stocks were being traded and is known as ‘floor-based open outcry system’ where traders in red jackets gather round a board and shout prices for bourse officials to record by pen. As primeval as it sounds, it has been in operation in Kenya for over a decade and is also the trading scheme in Uganda and Tanzania.
The much needed East Africa regional integration calls for a more sophisticated, easier way of trading in the securities markets. The open out-cry system is not only awkward and out-dated but also slow, reducing the market liquidity. That’s why the three East African countries are in the process of constructing a computerized system that will allow electronic trading of shares and bonds.
The Dar es Salaam Stock Exchange (DSE) is already in contact with Millennium Information Technologies of Sri Lanka, the firm approved to supply central depository systems, that will enable regional bourses be electronically integrated. The automated trading system has been installed in the Nairobi Stock Exchange (NSE) and this is expected at the Uganda Securities Exchange (USE), and the Dar es Salaam Stock Exchange (DSE). This will make trade faster and more efficient for investors; who will also hold electronic accounts.
This system will ease the listing of cross border initial public offers (IPO’s) and mass cross listing. It will also enable the region's Capital Markets Authorities and stock market regulators to monitor trading electronically. The NSE and the DSE have already installed central depository systems (CDS); while the USE seeks enactment of a bill that will allow the formation of the CDS.
As East Africa embraces electronic trading, the tradition-bound world of securities trading is unlikely to be the same again. For one thing we are venturing into an unknown field and the pros and cons of this scheme needs to be well thought-out.
Currently an investor wanting to trade a stock would call a broker, who would in turn call a trader, who in turn would place the order with a specialist at the NSE, DSE or USE. Electronic trading, however, will make this somewhat cumbersome process passé. An investor will not depend on specialists or market makers for trading but choose from a growing army of vendors with electronic trading networks.
The technology of electronic trading is quickly eliminating intermediaries in securities trading. It will enable the bourse to be more efficient in trade, raise profitability and reduce investor trading costs and improve investor returns. Electronic trade is easier, fair, less vulnerable to manipulation, and cheaper both for the exchanges and investors. South Africa is benefitting from this.
Still, electronic based trading leads to increased transparency in the trading of securities. This is enhanced by the fact that it increases the dissemination of information to all market participants which enables them to have balanced information. With more information, the market becomes quite competitive. The Capital Market Authorities will also have an easier time monitoring the activities of listed firms. This will help them curb any market malpractices such as insider trading and price manipulation.
In a perverse way, the threat of electronic trading is that investors are scared of it, regardless of the tremendous benefits that will make one embrace it. They are frightened of its future, and the change it may bring. Since they lack adequate knowledge of it’s operation, many of them will stay away for a while as they learn more about it.
Moreover, moving to the electronic trading will not be friction free for the East African countries. Already the market players in Uganda are complaining of the slow manner in which their Government is processing the CDS Bill. Officials at the USE have expressed their frustration at the delay by the CMA and the Cabinet in passing the Bill, which they say is putting USE operations and modernization behind those of the NSE and DSE.
As I see it, the new topsy-turvy world of electronic securities trading will open up borders for cross listing and move East Africa's integration process to an even higher gear. In time, virtually all securities trading by the exchanges will be conducted electronically.
By Kevin Mwanza
Mr. Mwanza is an African Executive Staff Writer
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