Investors Diary

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Wednesday, November 21, 2007

Financial Market Engineering in Kenya

Tremendous changes are occurring in financial markets and trading organizations as a result of technology developments. These advances in IT have created significant opportunities for;
1. Economies of scale,
2. Reduced transaction costs, and
3. Enhanced trading liquidity.
New market systems also create major risks for exchanges and their operators stemming as a result of competitive forces unleashed by open, global markets and real-time access.

Engineering questions to address for each of these three areas are:
1. Microstructure – What auction or other negotiation protocol serves in the interest of participants? Which protocols are innovative and applicable?
2. Infrastructure – How can the market protocols be implemented in a decentralized, highly scalable IT architecture? What technologies should be used? Which capacity and functionality demands have the highest priority?
3. Business governance structure – Who controls the market as an organization, and enhances its financial performance? What are the promising revenue models? Which services should be offered to whom at what price?

Since the outcomes from configuring these three dimensions today are still imperfectly understood, designing markets remains a challenging task. The approach of market engineering proposes that the design of electronic markets be approached holistically. Holistically means that all areas of the design – the microstructure, the infrastructure as well as the business structure – are simultaneously considered. The configuration of these different dimensions of a market is
guided by a structured engineering process.

As we strive to enhance the performance of our financial markets, it is imperative that we consider:

-Best Execution – What do we want from our markets?
-Innovative Products, Trading Mechanisms, and Services for Electronic Markets;
-Performance of market platforms;
-Auction and matching techniques;
- Models, methods, and tools for financial market
engineering; and
-Integrating mechanisms for multiple market modalities.

Growing our emerging market is challenging but realizable. Lets build our financial markets to status of the top dogs!!!

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