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VII. A. Automation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Written by: International Monetary Fund

Article Overview: The results from the previous sections show that African stock markets are small, illiquid, with infrastructural bottlenecks and weak regulatory institutions. Despite these problems, stock markets in Africa have helped in the financing of the growth of large corporations but there is little evidence of broader economic benefits. How do you make the stock market more beneficial to African countries?

VII. A. Automation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

The results from the previous sections show that African stock markets are small, illiquid,
with infrastructural bottlenecks and weak regulatory institutions. Despite these problems,
stock markets in Africa have helped in the financing of the growth of large corporations but
there is little evidence of broader economic benefits. How do you make the stock market
more beneficial to African countries? A number of propositions have been suggested to help
develop stock markets in Africa. These range from the need to increase automation,
demutualization of exchanges, regional integration of exchanges, promotion of institutional
investors, regulatory and supervisory improvements, involvement of foreigner investors, and
educational programs. Most of these propositions involve substantial benefits as well as cost
outlays. This section looks at the future of African stock markets by examining policy
options for promoting stock market development in Africa.
A. Automation
Automation is also expected to help reduce the costs and inefficiencies in African stock
markets and increase trading activity and liquidity.9 Automation helps to speed up operations
and activities of exchanges and reduces cost associated with manual systems. In addition,
automation makes it easier to extend trading days and hours due to less cumbersome
procedures. Automated trading also eliminates the need for trade intermediation since
investors can log onto systems to monitor markets and also trade on markets, thus bypassing
the use of brokers.
Automation of the trading system usually either precedes or is preceded by the adoption of a
central depository system (CDS). Under the CDS system, there is total elimination of risks
such as the loss, mutilation and theft of certificates associated with holding and trading of
paper-based securities of investors. CDS systems also reduce errors and delays associated
with paper-base Automation is an expensive venture and has huge budgetary implications for African
governments. This might explain why most African stock markets have found it difficult to
fully automate their systems.10 However, with the proliferation of electronic communication
networks (ECNs) and alternative trading systems (ATS), the cost of automation is gradually
reducing.
Other African stock exchanges can adopt the Namibian model whereby the NSX of Namibia
uses the trading system of the JSE of South Africa. The markets could also adopt the CDS
systems in similar manners. Admittedly the operational procedures of such an approach are
likely to be difficult in the absence of currency convertibility issues and harmonized financial
systems.
Automation is particularly important if African stock exchanges aim at integration. Without
automation the much touted benefits of regional stock market integration is likely to be lost.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

Related Articles
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  Introduction: Stock Market Development in Sub-Saharan Africa
  VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  VII G. Strengthen Education: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA
  VI. C. Institutional Quality: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

Article Tags: automated trading, bottlenecks, budgetary implications, cds system, central depository system, demutualization, economic benefits, gover, inefficiencies, institutional investors, intermediation, large corporations, outlays, policy options, regional integration, regulatory institutions, stock market development, stock markets, substantial benefits, system cds



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