The commission will seek to establish how the market land was taken away from traders and allocated to private developers.
The Commission on Administrative Justice (CAJ) received a complaint from a group of market traders, who alleged that the market had been appropriated by private developers.
The traders allege that the Nairobi City Council sold part of the market to two individuals in January 2007 under a public private partnership. The plot had been earmarked for the construction of a skyscraper.
The traders allege they have been operating in the market since 1965 and that in January 2009, the private developers accompanied by the Administration Police demolished their stalls.
The traders, who have allocation letters and receipts of rates paid to the Nairobi City Council, said that no alternative place of business was allocated to them after their eviction.
The Ombudsman investigation will look into dereliction of duty, abuse of power, unfair treatment and any injustice committed by officials of the city council in the matter.