Growing liquidity should be a priority for emerging market exchanges as it fosters broader market and economic development
The World Federation of Exchanges (“WFE”), which represents more than 200 market infrastructure providers including exchanges and CCPs, today published a report into growing liquidity in emerging market exchanges, in collaboration with global management consulting firm Oliver Wyman.
The report, entitled Enhancing Liquidity in Emerging Market Exchanges, is designed to provide regulators and exchange operators in emerging markets with ideas around how to grow and enhance market liquidity – liquidity levers – and a potential framework for which of those levers may work best at which stage of market development. Many emerging markets suffer from low levels of liquidity, effectively placing a constraint on economic and market development. Liquidity is positively associated with broader market development, and often creates a virtuous circle, resulting in encouraging effects for the underlying economy.
The report identifies three key areas that exchanges and regulators can focus on to grow liquidity, with each area having a number of corresponding liquidity levers:
- Promoting the development of a diverse investor base. Liquidity levers include:
- Providing an enabling environment for a larger retail investor base;
- Increasing the participation of, and incentivising, local institutional investors;
- Establishing a network of professional and regulated intermediaries;
- Attracting international investors.
- Increasing the pool of securities and associated financial products. Liquidity levers include:
- Optimising market admission requirements to increase the number of local or foreign listings;
- Launching exchange-traded funds (ETFs), to enhance the attractiveness of the market to existing and new investors;
- Developing exchange-traded derivatives, if certain conditions are met and if the right enabling infrastructure is in place;
- Creating a regional marketplace by linking with other markets, to harmonise regulatory standards, to facilitate cross-border issuance and investment, and to establish technical links.
- Investing in the creation of an enabling market environment. Liquidity levers include:
- Improving electronic trading technology to encourage a greater volume of trading;
- Enhancing market and reference data, thereby increasing investor confidence, trading activity and liquidity;
- Implementing market maker schemes;
- Introducing short-selling, and securities borrowing and lending schemes.
Through the use of relevant emerging market exchange case studies at varying stages of development (including the Philippines Stock Exchange, the Stock Exchange of Thailand, BM&FBOVESPA and the National Stock Exchange of India) – to highlight practical experience with these levers – the report outlines how each exchange has addressed and implemented some of the highlighted mechanisms. It also serves to show there is not a one-size-fits-all solution; the effectiveness of a lever will depend both on the dynamics of the particular market, and on how well it is implemented.
Nandini Sukumar, CEO, WFE, said: “We believe that exchanges, regulators and capital market participants in emerging markets can take action to grow liquidity, improve the efficiency of trading, and better service issuers and investors in their markets. By working together to create the requisite enabling market environment, the indirect benefits to emerging market economies could be significant.”
Daniela Peterhoff, Partner, Global Head of Market Infrastructure, Oliver Wyman, said: “Promoting a diverse investor base, increasing the pool of securities and investing in an enabling market environment are the three key actions points we identified to grow liquidity.”
The report was written in collaboration with Oliver Wyman, using its experience in a variety of markets, and WFE data, supported by interviews with, and case studies of, a number of WFE emerging market exchanges.