Business Management

Laurie Bowen (Global) - From BRICs to Mortar: Building on Emerging Market e-Trading Foundations Part I

To better tap investment funds from emerging markets and provide easier access for inward investment, more and more banks are looking to improve their e-trading infrastructure and connectivity in these countries. This two-part article discusses the challenges that financial institutions face in the roll-out of e-trading in emerging economies and ways to overcome them.

Building on emerging market e-trading foundations

Investors in emerging markets have been building ahead of steam, demanding the sophisticated trading capabilities they are used to in developed economies, along with the infrastructure and connectivity that can deliver seamless, fast, and agile trading and execution services.

With developed markets stagnating in 2008 and 2009, the emerging economies of Brazil, Russia, India, and China and South Africa (BRICS) and Colombia, Indonesia, Vietnam, Egypt and Turkey,(CIVET) are playing key roles in defining future global economic performance.

Banks now realize that emerging market exposure, whether through equity performance or bond yield, has become a critical feature of international investment activity. Senior bank executives of some of the leading players in emerging markets admit more attention and investment need to be applied to infrastructure and connectivity if these regions are to be traded on a par with their developed economy counterparts. This is according to an IDC Financial Insights study, sponsored by Tata Communications, which interviewed tier 1 and tier 2 financial institutions with significant trading interests in emerging markets. The respondents to this survey represent over half of the top 20 leading market participants in developing markets.

The not-so-smooth road ahead

At the same time, in seeking to maintain foreign investor interest and build sustainable capital markets, developing economies have started to embrace the electronic trading paradigm as a means of attracting and nurturing liquidity. These countries envisaged replicating the electronic model established in developed markets. However, there have been difficulties faced in laying appropriate foundations for both internal and external connectivity.

Infrastructure components that underpin electronic trading in emerging markets are not as readily available or as reliable as in developed markets, hindering the speed at which e-trading services can be rolled out and the level of sophistication that can be achieved.

Financial institutions that want to exist at the forefront of electronic trading developments should be planning a long-term, global infrastructure strategy that facilitates the rapid extension of electronic trading capabilities when demand justifies. They will have to be able to overcome the challenges of the lack of a truly global network to support their expansion, the lack of the ability to deal with the demands of routing different types of data traffic, and find a global partner with an extended footprint in the emerging markets.

Defining the extent of electronic trading provision in emerging markets

There are natural barriers to the development of e-trading services in emerging markets. In the first generation of these markets, institutions have already embarked on a commitment to break those barriers by enhancing local operations and local infrastructure. In Brazil, a large number of global trading institutions are committed to developing high frequency trading (HFT) and market making activities, with all of the latency reduction demands that such operations entail. In the second generation emerging markets, ambitions and expectations around e-trading remain fairly low. The speed at which markets transit from the second tier to the first will be determined by the speed of technological development at the exchange as well as the economic performance of the market.

Wanted: a global network for a global business

Banks recognise the need for emerging market agility, knowing that while current e-trading provision is appropriate for purpose, the rate at which emerging market exchanges are evolving their own infrastructure means that a greater range of trading techniques will quickly become relevant in certain growth locations.

Trading institutions need to identify growth locations early and develop a network that allows for the rapid deployment of more advanced techniques as they become competitive differentiators. The second part of this article will discuss the challenges and opportunities for institutions when extending their global network capabilities.

By Laurie Bowen, President, Sales & Strategy, Global Data and Mobility, Tata Communications


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