Upgrading Emerging Markets Trading Infrastructure


By Seth Merrin, Founder and CEO of Liquidnet.
Emerging equity markets, such as Thailand, continue to offer global investors the opportunity for the higher returns that asset managers are seeking to beat their benchmarks. The combination of attractive demographics, stabilising governments and rising GDP is a lure for funds, certainly compared to the issues facing markets such as Europe or the US.
For emerging markets, increased interest from outside investors presents an enormous opportunity. International capital inflow supports the development of companies and economies. Yet despite compelling growth stories, some emerging markets still face a significant challenge in attracting investment flows of any material size.
Currently, there is much more demand to invest in these fast growing developing markets than there is capacity to efficiently handle the investment. It’s estimated that 85% of investable assets are derived from the US and Europe and have historically been invested in western markets, where the investment infrastructure is mature and well developed. It’s the equivalent of five lane highways; the infrastructure of stock markets in emerging markets, on the other hand, is not as developed and unable to efficiently handle the institutional equity flows. These markets can be compared to country roads: very functional yet not able to handle heavy traffic.
In Asia, for example, the average trade size on domestic exchanges is around US$6,000. This compares to an average transaction size of more than US$1 million in Asia on Liquidnet, designed for large blocks of shares. The scarcity of liquidity in emerging markets forces up transaction costs as investors have to execute multiple trades to enter or exit a large position. Spreads between bids and offers, in some cases, can be over 100 basis points. On April 30, Liquidnet launched the trading of Thailand equities, which is the company’s 10th market in Asia and 42nd globally. The decision follows Liquidnet’s move to trade other emerging markets including the Philippines, Malaysia, Indonesia, Turkey and Mexico.
Thailand is one of the best performing equity markets in Asia in 2013 with the SET 50 Index surging 16.55% since the start of the year. The Thai economy is also growing strongly with Q4 GDP climbing 3.6%, while Standard & Poor’s raised the country’s debt rating to BBB+ , one notch below investment grade. At the same time, investors in the west are seeking diversification and access to new opportunities.
As we have seen when Liquidnet launched trading in Indonesian equities in January 2011, building better roads can lead to more traffic. The average trade size on Liquidnet in Indonesia in Q1 2013 neared US$1 million, which is around 300 times greater than average trades on the Jakarta Stock Exchange. Indonesia, an emerging economy, remains one of our most actively traded markets in Asia. We have similar hopes for Thailand. In actual fact the first Thai trade executed through us was only four minutes after opening, and was US$1.8 million.
Improved trading infrastructure also allows domestic investors the ability to access investment opportunities abroad. Many emerging markets, including Thailand, Philippines, Indonesia and Malaysia, are amassing large pools of capital as their economies develop. From sovereign wealth to pension funds and insurance, savings are growing. Local fund managers also seek diversification away from home markets, and as infrastructure improves capital from emerging markets today is certainly proving in high demand among the established markets in the west.