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Nairobi Stock Exchange Presentation

The Challenges Facing African Securities


Exchanges as They Upgrade their
Information Technology in Order to Remain
Competitive
By:
Mr. Chris Mwebesa
Chief Executive
Nairobi Stock Exchange (NSE)
9th ASEA CONFERENCE

NAIROBI STOCK EXCHANGE

Paradigm Shift in the Securities


Exchange Business

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Globalisation and the Information


Economy and its effect on Africa
Globalisation can be narrowly described as the
integration of financial markets characterised by free flow
of capital and other resources.
However a more expansive and eloquent definition must
include the social, political,economic and cultural
spheres of Globalisation.
Each of these spheres of Globalisation is supported by
the application of electronic commerce, the so-called
information economy.
Africa however is lagging behind in this transformation
leading to the so called technological or digital divide.

Securities exchanges operating as a "club of


brokers" offer these services as monopoly
operators serving largely under a mutual
governance structure.

The members of the club enjoy rights of


ownership, decision-making (one member, one
vote), and trading. Value enhancement of the
exchange is achieved by restricting access.

Securities exchanges are now increasingly


changing their business model and
restructuring themselves across the world due
to the simultaneous convergence of a number
of powerful developments.

Key change drivers include:


1.

Advances in ICT

2.

Convergence

3.

Connectedness

4.

Changing consumer trends

1. Advances in ICT:
Advances

in ICT are causing the


following: Reducing

information asymmetry thus


making markets more efficient;
Providing easier access to markets and
products, both domestically and
internationally;
Enabling more effective analysis and
monitoring of risk;
Allowing more accurate pricing and
redistribution of risk;

2. Convergence

Blurring of traditional boundaries between


banking, insurance and funds management

Balance-sheet intermediaries need the


skills of the dealer

Market traders need big balance sheets to


underwrite ever larger securities issues
bank

relationships and reputation count

Underlying techniques for defining and


managing risk also converge

3. Connectedness
On-going globalisation of financial services
facilitated
by roll-out of internet connectivity
Especially

evident in growth of ECNs


and on-line share trading

ECNs

account for 30% of all trades in


NASDAQ securities.

3. Connectedness
The proposed merger of the NYSE and
Archipelago
gives NYSE a way into NASDAQ listed stocks,
in which
Archipelago has a 25% market share, and the
growth
business of derivatives trading
supply side and demand side scale
economies are too powerful for
information-intensive industries to
resist digitisation

Global Alliances

NYSE

TSE

EURONEXT
(Paris,
Amsterdam,
Brussels)

Tokyo

Nasdaq/Ame
x

HKSE

Mexico

Brazil

SGX

ASX

MOUs Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore,


Taiwan,
Thailand, Tokyo

Source: ASX

4. Changing Consumer
Trends

As populations age, people need access to


higher rates of return on their savings, which
only come with higher risk;

More diverse life cycle experiences including:


greater job mobility,
longer periods spent in training and
education,
shifts in work leisure preferences and,
changes in family structures and
experiences.

4. Changing Consumer Trends

Better access to information and weakening


of traditional supply relationships are raising
consumer awareness of product and supplier
value, thereby increasing competitiveness in
markets;

Greater familiarity with the use of alternative


technologies means that more households are
pursuing lower cost and more convenient
means of accessing financial services.

Greater presence of institutions as investors;

The Challenges Facing African Stock


Exchanges

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Challenges

The Challenges Facing African Securities


Exchanges
as they upgrade or even in some cases embrace
Information Technology in order to remain
competitive cannot be isolated from the
challenges that
Africa as a continent faces as she attempts to take
advantage of the information revolution and hence
bridge
the infamous technological divide.

Challenges
The inequality in the information economy goes
beyond a
division between the developed and developing world
to
intra continent and further intra country divisions.
Specifically divisions arise from the possession of the
knowledge, skills and abilities to contribute to the
information economy.
In the information economy information and
knowledge are the most important factors of
production

Challenges
1.

The Development of Information and


Communications Infrastructure

2.

Human Resource Development and Employment


Creation

3.

Africas position in the Global Economy

4.

National and Regional Legal and Regulatory


Frameworks

5.

Cost Implications

6.

Change Management (Resistance to Change)

1. The Development of National


Information and Communications
Infrastructure:
The African information and communications
environment is characterized by:

Low telephone penetration rates;


Slow network growth;
Antiquated systems;
Sub-optimal reinvestment of profits;
High pricing of private facilities;
Poor inter-city telephone links;
Widely varying national infrastructures

1. The Development of National


Information and Communications
Infrastructure:
Access to information and communications
infrastructure is abysmal to say the least.
Achieving some form of universal access is
critical to Africa in order to make the information
economy effective.
A wide variety of information infrastructure
possibilities exist such as Multi-Purpose Info
Centers(MPCICs),Global Mobile Personal
Communications via Satellite(GMPCS) and local
wireless solutions that could be considered by
African Stock Exchanges to leap frog the
technological divide.

2. Human Resources
Development and Employment
Creation:

Low levels of education and literacy are


crippling Africas ability to exploit the
information economy. The limited use of
universal languages (English) is
often cited as an additional constraining factor.
Large components of the population whose
educational level and technical skills do not
fit (and may never fit) the new techno-economic
paradigm of the information technology are
likely
to rendered redundant.

2. Human Resources
Development and Employment
Creation:
Educational requirements for the information
economy are increasing in complexity yet
most national development programs on the
continent continue to base their employment
creation strategies on the perceived
comparative advantage that comes from
access to large pools of cheap unskilled
labour.

3. Africa in Global Economy:

Real and perceived incidents of endemic


macro-economic and political instability on
the continent has worsened the
competitive environment for the African
private sector and Stock exchanges are no
exception.

Attracting foreign investment which is one


of the key benefits from automation is
harder because of these perceptions.

The emergence of the global information


economy heavily dependant on knowledge
based products and services has further
exposed Africas already tenuous primary
production position in the global economy.

4. National and Regional Legal


and Regulatory Frameworks:
Appropriate and effective regulation of new information
economy systems enhances a countrys and by extension a
stock exchanges ability to attract investment
both domestic and foreign.
Effective compliance is key.
Thorny issues such as intellectual property protection,
privacy, security, data protection, electronic payments and
currency, and wide ranging consumer protection issues
remain to be addressed in national legislation and regional
Strategies.
Further with no real national boundaries, the legal
implications of
the internet and the World Wide Web are immense and are
certain to affect electronic trading.

5. Cost Implications(Capital
Outlays):

How to justify huge amounts of capital on


technology spend given the small market
size,
liquidity and depth, of national capital
markets,
which individually are very small and
illiquid to
effectively attract large pools of portfolio
flows;

Spend now or Later?

The costs of technology will continue to fall;

Technology has also made it possible to


analyze and monitor risk more effectively
and to disaggregate it on a broad scale;

To price it more accurately and to


redistribute it more efficiently;

Innovations will increase the ease and


security of electronic transactions;

Spend now or Later?


Technology has lowered barriers to entry;

Securities Exchanges that do not invest


in information technology
infrastructure, do so at the own peril

6. Change Management:

Human nature is such that change is almost


always resisted and hence must be managed
effectively;
Teething problems usually blamed on the
technology when in fact in most cases it is
other
factors or events that impact implementation.

The Way forward for African Stock


Exchanges

1.

Proper planning and implementation.

2.

Address regulatory issues


Address training needs
Effective Solutions

Regional Co-operation and coordination.

Continental and sub-regional

THANK YOU

Open Floor

NAIROBI STOCK EXCHANGE