The growing attractions of the emerging markets

Darren Sinden

Acuity found that 85% of senior prop traders were interested in the developing markets – 74 % of them expect to start sourcing market data and actively trading them within the next 12 months

Emerging markets were overlooked to some extent in 2020 as developed economies contended with challenges of their own. As the spread of coronavirus forced many to shut down, and then once out of lockdown to operate at reduced capacity and under a raft of restrictions.

Not that emerging markets weren’t affected by the pandemic they were and continue to be.

Rather it was just that those in the developed world turned their gaze inward rather than outward for change.

However, with vaccination programs underway in Europe and the US, it seems that traders are looking towards foreign and exotic shores once more.

A survey by market intelligence firm Acuiti, conducted on behalf of technology infrastructure business Avelacom, has found that proprietary traders are very much interested in the emerging and frontier markets once more.

Acuity found that 85% of senior prop traders they surveyed were interested in developing markets and that 74 % of those expect to start sourcing market data and actively trading these markets within the next 12 months.

China was seen as the most interesting country by the prop traders with 56% of respondent looking to start trading activity in the country and its markets.

India ran China a close second with 52% of the traders questioned conforming an interest in the worlds most populous country. Though difficulties in accessing domestic Indian markets as a foreign investor still present a considerable challenge.

Saudi Arabia which is attempting to reshape its economy and move away from its reliance on fossil fuels was also seen as a very interesting market place by the traders. The active stock market in the country which rose by just 3.8% during 2020 is seen as presenting an opportunity to traders. The country also has plans to launch a derivative exchange offering futures and options trading.

Prop traders are being drawn to the emerging markets because of two key opportunities. Firstly the chance to diversify revenue streams, which was cited by 65% of traders and secondly the possibility of arbitrage trading, which 62% of traders gave as the reason for their interest.

In terms of barriers to entry into emerging markets trading, a lack of clearing facilities was the biggest obstacle and was nominated by 62% of those surveyed as the greatest challenge.

The cost of additional IT infrastructure and deployment, particularly if it was to be co-located at an exchange, was mentioned by 59% of the traders questioned. Other high scoring hurdles were the regulatory environment and the cost of market data.

However, it’s not just proprietary traders that are being attracted to the emerging markets. US investment bankers State Street announced last week that it will set up a dedicated FX trading desk in Brazil, with both sales trading functions.

State Street recently acquired Sao Paulo based Natixis Brasil SA – Banco Múltiplo, as part of an expansion into Latin America and has recruited Marcia Rothschild, who is Brazilian by birth, to run the division from New York.

We recently highlighted the explosive growth in derivatives trading in Brazil seen over the course of 2020 on the country’s B3 exchange.

Brazil is a classic example of a growing market that’s currently underserved as far as financial markets are concerned. That creates obvious opportunities for overseas business to enter the market, something that local fintech’s and other disruptors are already trying to do

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