FORMING NEW TIES.
BRIC countries still hold their allure but as Dina Medland reports, investors are looking to connect to a wider group of emerging markets.
Emerging markets are jostling for centre stage. The BRIC moniker has served its purpose as a means of identifying disparate countries with strong growth potential, but different dynamics at play. Amid slowing economic growth in China and Brazil, political uncertainties in Russia and huge infrastructure and political paralysis in India, investors remain keen to hunt for the next story.
The focus is subtly shifting from Russia to Eastern Europe and from Brazil to a wider Latin America – with Asia ex-Japan not far behind – and the ‘exotic connections’ of yesterday are becoming the ‘de rigueur’ ones of today. Linking to these markets though is not always easy as latency, connectivity and market infrastructure in general vary across the different regions.
Philippe Carré, global head of connectivity for SunGard’s capital markets business, responsible for the delivery of hosted services and solutions to trading clients on both the buyside and the sellside, says, “There is a big story on the margins of Europe from the Baltics all the way to Turkey. Russia has highly developed infrastructure and is an emerged market wearing the cloak of an emerging one and might be on the verge of cleaning up its political act. We are seeing stock-picking investors going to Indonesia and the other ASEAN nations in which it is becoming easier to trade. In Latin America both Mexico and Brazil attract strong interest from asset managers and although the overall market is somewhat fragmented, there is talk of co-operation and we could see a grouping of exchanges along the lines of Euronext in Europe.”
Such a grouping may not happen for some time yet, but there are signs of a trend towards vertical integration of market infrastructure. Carré also points out that Colombia, Peru, Chile and Argentina have all come a long way in improving their infrastructures and thus their links – both electronically and culturally – to the global investment community. Challenges remain – in Peru, for example, the Bolsa de Valores de Lima (BVL) exchange owns 40% of Cavali, a private group responsible for clearing and settlement of securities, but cannot raise its stake any higher because doing so is prohibited under law.
For BT, which supports the largest secure network for the financial community in the world including its Radianz Services available to more than 400 financial institutions in 63 countries, offering economies of scale is the key. Chris Pickles, head of industry initiatives in global banking and financial markets notes, “In countries like Brazil, more brokers want to gain access to other brokers – the ones who are members of the BM&F Bovespa – while the biggest banks will connect directly.”
Beyond connectivity, best execution issues are complicated, but there are signs that change is afoot – Comissão de Valores Mobiliários (CVM), the securities and exchange commission of Brazil, recently instructed the UK economic consultancy Oxera to assess the potential costs and benefits of introducing more competition into the market for trading and post-trading services in Brazil. According to its report, “As Bovespa is the only infrastructure provider of trading and post-trading services for transactions in equities in Brazil and competitive pressure from American Depository Receipts (ADRs) may be limited, the fees charged for trading and post-trading services could be higher than they would be in a competitive market.”
Interest in Brazil is unlikely to diminish. In fact, former US President Bill Clinton at a conference in São Paulo in late August put his money on the country over China and India. However, companies like MarketPrizm, which offer global trading infrastructure, are focusing its gaze more intently on Russia and Eastern Europe as well as Asia although Brazil is still very much in the picture.
The main drivers are client demand and market fragmentation. As CEO Tanuja Randery says, “Our customers are largely primarily prop funds, and quant driven groups, funds, prime brokers and investment banks. The equities market is very sluggish, so the real activity is in commodities and futures/options and that is why Russian markets are particularly attractive. Warsaw is also coming up a great deal as interesting; people are writing strategies to these markets. In each market we put in a whole co-location slot infrastructure to offer direct market access, and need to provide a focus on low latency data and order routing.”
At BT, Pickles says that the real competitive scramble today is for the derivative markets. “If you’re running an exchange operation you are trying to expand derivatives into other countries. Each of the majors is trying to build out its community and emerging markets are recognising the importance of both derivatives and foreign exchange as the exchange markets become more transparent in the face of regulation.”
TMX Atrium, a provider of infrastructure solutions for the financial community, last month (August) announced new low latency connectivity into Moscow from Stockholm, providing access to key data centres to enable participants to trade the rapidly growing Russian market. The data centres in Moscow and the greater liquidity in London is a combination that is currently providing interesting opportunities for arbitrage.
Emmanuel Carjat, TMX Atrium’s MD, says: “Our venue-neutral platform is designed to enhance and add supplementary routes as clients demand to provide access to multiple markets, regions and venues to trade the full range of asset classes. We recognise that our client base wish to execute arbitrage strategies between key data centres and in line with our expansion strategy, we will continue to refine our connectivity capabilities to meet these demands.”
Russia does though have its challenges, such as language and the state of technology, according to Carjat. English may be the lingua franca of finance, but it is worth remembering that in emerging markets it can also be short in supply. “In addition at the technical level, some of things we take for granted e.g. voltage levels will be different which requires specialised power adapters for your equipment,” he says. “You might be doing something routine but you can be sure it will not go smoothly.”
Progress though is being made. For example, the Moscow exchange, MICEX-RTS, is expected to launch an initial public offering next year and the Russian government is pushing domestic companies to list at home in order to boost the liquidity of the local market. While market participants welcome the changes, the MICEX-RTS cannot be complacent as the winds of competition are blowing from the CEE, in particular Warsaw.
Opportunities also abound on the latency front especially in Asia as asset managers and brokers trading the region’s equities want faster access to exchanges and market data. In response, the Asia Submarine-cable Express a new underwater cable costing $430m aimed at automated traders opened for business tracing a 7,800km route from Japan to Singapore and Malaysia. Hong Kong will soon be included in the loop which will shave three milliseconds off the speed offered by existing cables and providing the shortest link between the Tokyo and Singapore bourses.