In the global economy, hedge funds demand to connect and trade with any counterparty in any part of the world. But what once was a much more difficult proposition is now commonplace thanks to electronic trading systems and networks used by traders all over the globe. Despite the advances, however, once connectivity is established, buy-side traders still face many challenges when it comes to trading in emerging and even frontier markets. In short, accessing market data, managing workflow and adoption of trading standards are still major pain points.
Getting accurate market data from overseas can be the most difficult challenge in the emerging markets, according to Scott DePetris, COO of Portware, the global provider of trade management software. His firm has a fairly large percentage of clients that trade in emerging or frontier markets as well as in every market that allows a connection.
"The connectivity aspect in today's world is oddly one of the lesser issues as there are many players and partners out there that provide the underlying fiber," says Depetris. The more complex story, he adds, is how to help asset managers once they have established connectivity by creating visibility, transparency and workflow tools to make trading in those markets more efficient.
In some countries, Depetris continues, trading is done on an appointment basis, or there are stringent ID requirements that must be met before a trader can trade in the market. In those markets, accessing liquidity, timing the market and getting accurate data can be challenging, he acknowledges, adding that buy-side traders rely on their execution management providers to offer them the tools they need to analyze their trades and understand the various markets.
"Ensuring that we have market data and are alerted that there is activity in a certain stock is important information," DePetris explains. Understanding and following an order from a historical lifecycle perspective also is critical. A trade on the Kenya Exchange that takes three months to executive is much more complicated than a trade with a three-day trade cycle, for example. "Calculating the benchmark price and looking at the interval VWAP is now three months long and not three days long," DePetris says.
The manual aspects of some markets also make trading, and accessing market data, difficult. Where trades are done by appointment, often a phone call is required before you can send an order. Traders need tools to track when you need to make the call and send the order. Firms such as Portware and others help their customers gain more visibility in these markets by giving them tools to help them handle the nuances of the markets. "Workflows for the emerging markets can be and are much more complex than the developed markets," DePetris notes. But, "By and large, we do see emerging markets spending more on infrastructure and regulation and becoming more in line with the developed markets," he adds.
It has taken time to develop tools, controls and data for markets such as Africa, the Middle East and India, DePetris points out. "They are not just equity-centric," he says. "They also trade futures, and where there is a futures market there is also a level of FX."
These maturing markets, however, are showing some signs of growing pains as the more established markets in the U.S. and Europe deal with a homegrown credit crisis and currency collapse. India, for example, is practically in its awkward teenage years, according to some observers. "They have very high inflation, very high food and energy costs, a growing middle class, and they will be there for the next five to 10 years," says Anthony Michael, head of fixed income, Asia Pacific, for Aberdeen Asset Management Asia. "Their economies are going to grow through this crisis, and that's one of the attractive things about these regions."
Traders need to be able to capture all of the trades, including manual trades, and those executions need to make it back into a system so that traders can manage their risk -- and that's how partner firms such as Portware help their buy-side customers, DePetris asserts.
"We leverage what we've learned with one client and make it available to future clients," he says. "Every market is different, with different physical access providers, the rules and regulations; but the market data component is the most complex."
Gearing Up In a New Market
A lot goes into entering a new market and setting up the tools, protocols and connectivity. "When we approach a market that is new to us, there are certain steps we take," DePetris says. "It's very much a team effort. There are things we need to learn from the markets -- like what the challenges are. Then we assess where we think the stumbling blocks will be. The next step is working with that market to get the rules, regulations and compliance in order to effectively manage the trading in that emerging market."
Although there were numerous challenges early on, the process now is somewhat productized and infinitely easier, according to DePetris. "We started working with many of the emerging markets about two and a half years ago. Some of them were still trading manually where you had to pick up the phone and input a ticket into a system," he recalls. "Now many of these markets are more electronic and we can access them electronically."
There's another important piece to the puzzle that organizations such as FIX Protocol Limited work to solve. FPL is made up of member firms from across the globe as the organization responsible for maintaining and promoting the FIX protocol, the global standard for buy side-to-sell side communications that also is gaining traction inside the exchange community.