Opening Cross: Emerging Markets Are Hot

…And humid, as I discovered during our Asia-Pacific Financial Information Conference (hosted jointly with our friends at FISD) in Hong Kong last week. And though Asia attracts the most attention, Latin America (Tullett Prebon increased its LatAm emerging markets team in North America last week), Eastern Europe and Africa are all on investors’ radars.

For example, Thomson Reuters has stepped up the data it carries from African exchanges over the past 12 months—most recently with data from the Mauritius-based Global Board of Trade, a new pan-African, multi-asset exchange. In addition to basic exchange prices, the vendor is also providing company fundamentals and financials, estimates and M&A data.

In some markets, this information can be hard to obtain—possibly protected by arcane licensing regimes, or just requiring significant effort to pull together by oneself—if it exists at all. These are instances where not only do vendors prove their value-add, but indexes can offer convenient investment vehicles, created by specialists who understand a market so that individual investors don’t have to.

“A BRIC index is a vehicle for people to put money into emerging markets right away without having to research individual companies in a region. They don’t have to do the research, they just need to know the buzzword,” says David Blitzer, managing director and chairman of the index committee at Standard & Poor’s. “The same goes for Vietnam, for example—someone says it’s a hot market, but it’s hard to do the research, so you use an index.”

Another fast-growing trend in Asia is high-frequency trading. The Tokyo Stock Exchange’s new Arrowhead high-performance trading system has contributed to that, reducing latency, increasing data volumes, and placing more pressure on the infrastructure of the markets overall, and other exchanges are now in the midst of major upgrades. For example, the Singapore Exchange is setting up a co-location facility to provide low-latency access to its data and trading platforms, while Hong Kong Exchanges and Clearing is rolling out a swathe of upgrades, and is building a next-generation datacenter to support co-location and new datafeed products.

Panelists at the conference pointed out that HFT can generate big profits, but also requires significant technology investment and continuous infrastructure optimization.

“Is it required for us to use high-frequency trading? Yes, definitely, but we have yet to quantify the key performance indicators around HFT,” says Victor Ekong, head of market data technology at Citigroup.

One driver for the growth of HFT may be not just that Asian markets still offer more opportunity for higher returns than the US and Europe—in fact, conference speakers say they are seeing investment reduced in those markets to fund more activity in Asia—but that since HFT is less mature in Asia, so too is regulation of HFT. And in particular—with more demand for closer regulatory scrutiny of HFT (see our Latency Web Seminar writeup in this issue of IMD)—the region lacks a central, standardized regulatory regime to monitor and police the practice.

“Absent this regulatory catalyst, there exists regulatory arbitrage and regulatory competition, because regulators are not only policing their own capital markets—they are also promoting them. Every regulator wants its market to be the gateway to Asia, and must be willing to work with the broker community to open up markets,” says James Pak, chief strategy and product officer at Chi-X Global.

Let’s just hope that hospitality doesn’t invite an unwelcome guest in the form of an Asian “Flash Crash” that these growing markets are simply not prepared for.