Moving slow but showing promise
In spite of the historically lethargic evolution of the liquidity landscape , current emerging market regulatory preparations ahead of MiFID II point to a future that will support better levels of trading transparency , including pre- and post-trade governance . This is being spurred by a growing focus on passporting , MiFID II “ venue equivalence ” and best-practice adoption across non-EEA emerging regions . Local regulators too have increased direct investor engagement , working to enhance operational workflows and technology infrastructure to improve overall market liquidity for underlying asset owners . This is already evident in the Czech Republic , Hungary and Turkey , which are all moving forward with local multilateral venue partnerships .
Increased focus on core liquidity
In Central and Eastern Europe , the Middle East and Africa ( CEEMEA ), the local dominance of primary exchanges have led to a slower development of secondary and alternative venues , where regulatory attention on core liquidity has worked to prioritise local share ownership and reinforce regional capital markets . This measured pace of evolution has increased local shareholder concentration and prioritised primary venue , including local broker activity , naturally affecting opportunity cost and trading performance for international investors . Local clearing houses and foreign investor rules have equally heightened the dominance of local exchange members with cumbersome execution , trade reporting and operational processes . All are slowing the evolution of open market practice and asset ownership across international investors .
More compression , less competition
A global trend shows a compression in asset management fees that is increasing the emphasis on transaction and operational settlement costs . This change in the buy-side model has driven some retrenchment in operational business growth . An overall pull-back in industry development has reduced the onshore presence of buy-side managers and some international brokers . The reduction of the breadth of the market and the specialisation of managers and brokers is likely to result in a reduction in competition and liquidity , while innovation looks to provide a solution longer term .
Citi operates in 160 countries , giving clients a consistent execution framework and platform across developed and emerging markets . The result is a standardised service model that imbues traders and investors with confidence in the end-toend product , which includes compliance , market oversight and operational support .
Correlation and asset classes
From an investment perspective , emerging markets have also seen rising levels of correlation to USD FX and treasury yields , brought about by high USD corporate debt issuance and an increasing global focus on income alternatives in a low , real-rate environment . This alternative yield halo effect has supported the global dominance of highly liquid passive ETF products , further affecting local market volumes , with a handful of ETF issuers exporting local liquidity to alternative US-listed instruments . In 2016 , lower commodity prices , USD rallies and failing emerging market corporate earnings reversed the appetite for non-specialist exposure . This was highlighted by net 2016 full-year outflows in CEEMEA versus rising developed market equity AuMs exacerbated by the impact of Trump ’ s US presidential election on rising US dollar nominal bond yields .
Passive approaches to liquidity
Changes like those already mentioned have also driven an increasing passive bias and “ by appointment ” approach to active high-nominal block-trading activity . The exporting of passive , low-risk liquidity to ETF-listed markets has further compounded turnover . This has had an impact on free-float liquidity and created a narrowing specialist investor base more focused on a long-term return outlook , contributing to rising volatility and intra-sector correlation during periods of acute market stress .
Factoring in market impact costs
Transaction costs have underscored less progressive microstructure development , reflecting , in part , fairly unchanged levels in estimated market impact costs , certainly over the past five years ( excluding brokerage and fees ). In CEEMEA markets , impact costs remained static at 2.5x that of developed markets . Reflected across underlying countries , this appears heavily biased toward the Middle East and North Africa ( MENA ), while Russia , Turkey and South Africa highlight overall lower levels in regional impact .
Citi supports moves in emerging markets to open competition , including opening market access , to international investors and brokers . Its global footprint and leading access to local markets continues to draw on the strength of these developments to provide optimal liquidity solutions and reduced market impact .
Capitalising on the next solution
In a post-MiFID II regime , market participants looking to identity and implement their emerging market liquidity solution should identify a broker partner who can support them with full-suite execution access . That support should include things like support across conditional venue liquidity crossing , trajectory crossing across parent orders and broader development in venue selection . Moreover , ongoing development in IOI functionality , block capital provision and intermediary risk transfer in low liquidity environments should continue to differentiate the broker-dealer execution offering .
March 2017 www . buysideintel . com
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