Technology can help EMs, FMs

Emerging markets (EMs), as defined under the MSCI stock market index, are countries which have not yet reached developed country status and yet exhibit rapid growth and industrialisation. China, India, Egypt and Morocco are among 21 nations that fall under this category.

Frontier markets (FMs), on the other hand, are EMs with lower market capitalisation and liquidity compared with their more developed peers. FMs are normally targeted by investors who want high, long-term returns and lower correlation with other markets. Over time, FMs eventually gain similar levels of liquidity, risk and return characteristics as the more developed EMs.

There are many Mena countries that fall under FM, including Tunisia, Bahrain, Jordan, Kuwait, Leban-on, Oman, Qatar, Saudi Arabia and the UAE.

Emerging and frontier markets are important for global stock exchanges, as they account for 38 per cent of available markets in the world. Dev-eloped markets represent only 17 per cent, and 45 per cent of the world markets are below FM level.

EMs and FMs offer better returns compared to several more established markets, have a rapidly growing liquidity pool and lower correlation to more traditional markets, and are characterised by constantly improving information and market access.

Moreover, the trading-related regulatory frameworks of these markets have shown marked improvement over the last few years. By far the greatest indicator that proves EMs and FMs are a force to be reckoned with is their growth levels over 2009 and in the first quarter of this year.

The aggregate population of EMs and FMs is 69 per cent of the global population, so the share of these markets in worldwide equity trading has the potential for more growth. Brokers engaged with these markets agree that technology will play a critical role in accelerating expansion and optimising services.

Technology has enabled stock exchanges to evolve into a world of automated transactions done at milli-second speeds, and in the process has helped dramatically enhance domestic and international financial systems. Emerging and frontier markets should definitely improve the technological aspects of their trading activities, but at the same time be wary of risks such as security breaches and crippling downtimes that can result from poor planning or partnerships with substandard technology.

There are numerous benefits to employing technology in EM/FM trading. For one, the Direct Market Access (DMA) and Market Data Feeds (MDF) provided by automated trading systems support greater market efficiency. Automated tools also allow markets to sustain high growth, reach a larger number of investors, drive down trade execution and settlement costs, and improve risk management.

The type of trading technology to deploy depends on the nature and function of the particular stakeholder along the trading chain. For example, stock exchanges are advised to use Automated Trading Systems, Central Depository Systems, DMA, MDF, and Surveillance and Risk Management Systems.

Brokerages, investors and asset managers would benefit from next-generation yet affordable order management systems, straight-through processing technologies, and advanced risk management, market information and analytical tools.

The writer is founder and chairman of National Technology Group