Treading Cautiously into Emerging Markets

Michael Ourabah, CEO, BSO

After some of the most volatile market trading seen for some time and an atmosphere of pessimism around possible deflation and regional recessions, it is hardly surprising that investors remain concerned about emerging markets during the first half of 2016.

Caution remains the topic of the day. The most important question however, is what the long-term impact of volatility will be on the confidence of international investors. Not as much as first thought it seems. There are many for whom the lure of high-gains outweighs the risks and if the demand for network connectivity to Shanghai, Mumbai, Tokyo and other Asian exchanges is anything to go by, there is still plenty of confidence present in the industry.

Emerging markets will always be more difficult to navigate than established hubs, but traders are simply adjusting their approaches, partly in response to improvements in how trading platform providers and market data companies are delivering investment capabilities to customers.

Exchange operators are also overcoming the challenges associated with legacy telecommunications infrastructure and governmental underinvestment in connectivity to other parts of the world.

For an international investor, connectivity to an emerging market has typically been slow, unreliable and expensive, especially it is provided by a carrier unfamiliar with the region – characteristics that are not suitable for say, High Frequency Trading.

Trading Challenges for Opportunities

Thankfully, the options available to the financial sector are starting to change for the better – a number of specialist providers have made it their mission to improve how organisations connect to the region. Why is this so important, though?

Emerging markets tend to have different, continuously evolving regulatory landscapes in relation to technical infrastructure, governance and market transparency. These need to be navigated carefully from a telecommunications perspective.

A trader may also face a shift in the sentiment of certain trading subsets, like that demonstrated towards High Frequency Trading by Chinese market operators, or incidences such as ‘market spoofing’ – the generation of mock orders to unfairly influence a share price. Authorities are still considering the value of a timed delay on High Frequency trades to reduce the effects of ‘flash crashes’. If regulation is approved, this could affect investors committed to the region – it shows the need to be able to move into and out of exchanges quickly.

The final point is the cultural difference. Issues relating to language, technical problems, long timescales, engineering standards and varying quality of service can all have a negative impact on fund profitability. Investors using brokerage and market data platforms are generally protected and protected from these issues, but larger traders and investment houses can find it hard to quickly build a global network that matches their investment objectives when they are faced with delays and frustrations.

Ultimately, there is speed. There is little use identifying a new market only to wait a year for the network to be available. Financial organisations need a rapid response to their connectivity demands when they choose to invest in a new region, although not every carrier has the ability to deliver such results. Ensure you identify one that is experienced in your desired market and has proven case studies.

One point to conclude on – determination does generally win out. If a region offers enough incentive, and due diligence is carried out in advance on trading systems and connectivity to an exchange, emerging markets still offer a significant advantage when investment is timed effectively. It is just a case of deciding when a new location is right for you.

Author: Dylan Jones

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