MAKING TRADING RELEVANT IN EMERGING MARKETS.
Donna Nemer, JSE Director of Capital Markets and Group Strategy and Merlin Rajah, JSE Senior Technical Account Manager: Equities & Equity Derivatives
There have been significant advancements in emerging market exchanges, that have increased investment to enhance technology, order execution, market structure, and in so doing, liquidity. New order functionality, along with broader suites of data, low-latency offerings, as well as enhanced trading, clearing and risk systems are just some of the mechanisms intended to provide faster and more transparent information to investors and their clients.
The Johannesburg Stock Exchange (JSE) offers multi-asset class, fully electronic, secure trading with internationally recognised and awarded regulation, trading and clearing systems, settlement assurance and risk management. As part of its growth journey, the JSE implemented an electronic trading platform for government bonds in 2018, which made use of the MTS system operated out of Milan. This allowed for central automation as well as increased transparency in the local debt markets. In early 2019, the JSE will go live with its equity and currency derivatives markets on the Millennium trading platform, which is also the technology system used to operate the cash equities market.
The rest of the African continent is also witnessing ongoing investment to deploy advancements in trading technology. For example, the Nigerian Stock Exchange announced in December 2018 that they will continue to leverage Nasdaq’s matching engine technology for its equities and fixed income markets for another five years, while, in 2017, the Nairobi Stock Exchange issued its first-ever government bond that could be traded exclusively on a mobile phone. A year later it unveiled its mobile app, which provides investors with real-time financial market data, financial analysis and the ability to invest with virtual money. However, the lack of liquidity and activity in some of these markets make it difficult to support a compelling case given the lack of scalability.
Another challenge is that of the adoption of MiFID II. While developed markets are accommodative, the requirements under this legislative framework have not been formally adopted by all emerging markets. This is no surprise as emerging markets are historically policy-takers. The changes that have been implemented cater for sets of regulation across the board and are driven by the large international asset management and sellside firms who are seeking to achieve unified best practice.
One key difference between very large liquid markets and emerging markets is the definition of ‘best execution’. In many emerging markets, there is either a single exchange or one very dominant player. This means the best quality of liquidity will be found on these main exchanges, where the largest number of diversified buyers and sellers reside, as is the case in South Africa, at the JSE. Market participants in emerging markets are increasingly embracing the benefits of ‘best execution’ but given the structural constraints, regulators will most likely allow the market and its participants to evolve, rather than enforcing all trading participants to connect to multiple exchanges for best execution.
As to the unbundling of research and execution under MiFID II, the brokerage and execution providers have become much more competitive. In emerging markets, a subset of listed shares typically dominates trade and market activity. These stocks attract the interest of analysts and research teams whereas small and mid-cap stocks are generally not as well covered and are seen as less attractive given the higher liquidity risk in these countries.
Looking ahead, there is an expectation that emerging markets will continue outperforming many of the larger developed markets especially as China builds dominance. Stronger risk adjusted returns will also make them an attractive asset class. As a result, index providers are helping drive this awareness as they develop new and bespoke indices and products for exchange traded fund (ETF) issuers to cater for demand. These dynamics supports the case to continually deepen trading functionality, market quality and liquidity to grow emerging markets.
©Best Execution 2019