With a more sophisticated environment, bourses in emerging and frontier markets are looking for new sources of revenue. New products and services are being designed to boost bourses’ profitability and ability to compete in a challenging world.
Standard for the un-standardised: Embracing multi-asset platforms in the exchanges’ infrastructure
While emerging markets may not boast the array of products being offered by the world’s global financial centres, innovative leaders are coming with bold plans to grow their exchanges through diversifying their offerings. Like many of his peers, Loh Boon Chye, who took the helm of the Singapore Stock Exchange (SGX) in 2015, is forging ahead with fixed income and foreign exchange initiatives. “The Asian bond market outside Japan is $8 trillion in size,” Mr. Loh told the Straits Times last year.
“But the secondary liquidity is fragmented, and most bonds, after their initial placement, will eventually wind up with investors and regional dealers,” he said.
“So we saw a need for a market infrastructure solution. That’s why we aim to launch our bond trading system early into 2016. Yes, we need equities, we need IPOs (initial public offerings), but debt financing is also a significant part of the capital market.”
Similarly, the Qatar Stock Exchange (QSE), is seeking to attract more activity with products catering to a variety of traders. “With the introduction of Margin trading, investors will be given the opportunity to increase the size and scope of their portfolios without having to tie up more of their capital,” explains CEO Rashid bin Ali Al-Mansoori. “This will also improve market liquidity. Our product diversification strategy is simple; list products that provide access to markets outside Qatar and allow easier access to a broader range of asset classes within Qatar. What should be noted by regulators, policy-makers and ordinary citizens is that, while a range of alternatives exist for many of the things exchanges do, how these markets are operated remains extremely important. Certain values, including transparency and fairness, are very valuable indeed.
Another possible space for revenue growth exists in post-trade services, industry analysts say. “We conducted a study of the post-trade ecosystem for sell-side firms, custodians and utilities, in both the United States and Europe,” Michael C. Bodson, president and chief executive of The Depository Trust & Clearing Corporation (DTCC) told FTSE Global Markets. Bringing more of these services in-house, Bodson believes, can allow bourses to help customers bypass inefficiencies of non-integrated systems, provide more confidence, safe regulatory compliance and operational robustness.
“If the industry could more effectively leverage its utilities, such as DTCC, Euroclear, SWIFT, the Options Clearing Corporation (OCC) and others, and if the utilities could collaborate to a greater degree than they have in the past, then we would see huge opportunities to centralise and standardise certain non-differentiating processes to drive down costs and risks through economies of scale.”
Meanwhile, India’s National Stock Exchange (NSE), introduced ambitious new technology services last year that aim to provide traders with deeper insight into the market. NSE launched its new services ‘NLABS,’ which features an algorithm trading system with replay of historical market data and near live trading test experience, we well as a revamped NSEIL Dashboard which caters to traders functioning on currency derivatives, futures and options, capital market segment, securities lending and borrowing market, mutual fund service system.
A new set of clients: opportunities from changes in the profile of investors and companies
Even as exchanges look to add products and revamp services, the allure of bringing more clients into the fold holds promise. Here, exchange leaders are looking for opportunities to cash in on the evolving profile of investors and companies in their home markets, and many see small and medium enterprises (SMEs) as a key to expanding their reach. The Philippine Stock Exchange (PSE), to cite just one example, last year held a special listing forum for SMEs. The PSE, along with the state-owned Development Bank of the Philippines (DBP) sought to help familiarise business owners with the basics of equities investment, initial public offerings and equip them with steps and process for developing their business through capital markets.
Working the other end of new business generation, exchanges in Africa have sought to roll out mobile financial services (MFS), which they hope will expand their pool of investors. Emerging players in this space include South Africa’s Jumo, which is developing microloans and credit checks via mobile usage history. Proponents point to the explosion in mobile banking in Africa, and say that sufficient momentum exists to build out investment products that cater to sophisticated investors. Showing this potential, early this year, the Dar es Salaam Stock Exchange (DSE) reported that mobile trading volumes shot up by more than 40% just in the last four months of 2015. “We envisage the increase of the size of mobile trading platform as more and more people get to know the existence and operability of this technology,” DSE Chief Executive Officer Moremi Marwa told AllAfrica.com.
The potential for mobile business extends beyond Africa. Mobile trading turnover on India’s NSE increased by nearly 50% in 2014 alone, while it doubled on the Bombay Stock Exchange (BSE) during roughly the same time period. Experts say that these volumes could double in the next two years as smartphone sales in India surge and mobile networks provide faster and more reliable service.
Benefiting from the technology beat
With trading technology becoming ever-more sophisticated and imbedded in the basic functions trading, more attention is being paid to how the kind of specific data that belongs to exchanges can be leveraged and monetised. “Opportunities can hide in plain sight,” according to a research report published by Strategy&. “Consider, for example, the data available to financial-services firms about their customers’ behaviour, their suppliers’ practices, their costs and profits, and their own operations.
Data of this sort is so abundant that it is often overlooked. Its growth is so exponential that the companies are unprepared.”
Strategy& estimates that the revenue from commercialising data and analytics will soar from $175 billion in 2013 to about $300 billion per year by 2018, with capital markets accounting for 30% of this potential revenue, second only to consumer finance and banking at 35%. Similarly, research by CSC urges financial services providers to embrace user and client data not only in their IT departments, but also in marketing, sales, customer service, product development and so on.
Kenya: Building market liquidity through transparency
Even as many exchanges worldwide look to entice traders and investors with new technologies and expanded portfolios of products, liquidity remains a preeminent challenge. “Liquidity in African markets is low compared to international norms,” says Geoffrey Odundo, CEO of the Nairobi Securities Exchange (NSE). “Many factors contribute to this, such as a lack of counters listed on the exchanges, restrictive limits on short-selling, the absence of retail investors from the markets, a lack of both product and documentation standardisation, the large and long term holdings of pension funds, and high transaction costs. International investors are certainly keen on Africa, but poor liquidity in these financial markets is deterring them.
The answer, Mr. Odundo argues, is to create and nurture confidence in the country’s capital markets by emulating the best practices from around the world. “In Kenya the Nairobi Securities Exchange is working with various stakeholders to develop a comprehensive framework and requisite regulations to enable market makers, short sellers and stock lenders to operate in the domestic capital market,” he explains. “The market makers will provide both selling and buying prices to ensure that an investor actually buys or sells the units they seek to at a specified price at any time. The Exchange Traded Funds (ETFs) will help us to balance and increase our liquidity, as some smaller exchanges historically had suffered from a lack of liquidity – as it was the case for NSE before. Investors want to be able to trade when they choose. Listed companies, on their part, are always looking for liquidity in their own stock, as it tends to lead to a fair market-driven valuation. Liquidity is the lifeblood of any exchange; it is the ease with which shares can be bought and sold and is critical for buoyant secondary trading. For a market to work effectively and have a stronger liquidity it must have the ability to engage in short selling.
“If you look at our capital markets framework today in Kenya compared to other markets, we have set up one of the most modern frameworks that can meet the international investor expectations. We have a very modern regulatory framework, proper regulatory and capital markets infrastructure, a modernised depository and an exchange. There is a strong capacity in Kenya where over the last years the number of graduate charter-holders of CFA have increased tremendously. Our corporate finance sector is vibrant and doing very big transactions in East and Central Africa. If you look at the whole framework we’ve got everything that a modem market has but it’s small-sized, so what’s next? Scale! I’m very bullish about our economy in fact it’s only this year that we have suffered challenges on macros but it’s all over the world. I think Kenya is one of the few countries in Africa with one of the most advanced and progressive constitutions.”
These developments will help the country build up both confidence and a critical mass that will help to sustain an investor culture and sow the seeds of entrepreneurism, Mr. Odundo concludes. “Kenyans know their democracy has really expanded that growth, so I’m very confident about this market. I think we have got everything right in place, we just need to scale up on growth, so I’m very bullish about it.”
Compelling stocks still the main draw for exchanges worldwide
Even as many developing countries face significant economic headwinds, their securities exchanges continue to be home to companies that, while they may not be household names, continue to present investors with compelling stories. “Certainly with the price of oil where it is we could see the development plans scaled back somewhat,” says Ayad Abdul Mohsin Al Thuwainy, Vice Chairman of Kuwait’s Ahmadiah Contracting & Trading Co. “However, this is really an opportunity for more public-private-partnerships (PPPs), which have already started successfully in Kuwait a few years ago with the Az-Zour North gas-fired combined cycle power plant. The results of these partnerships have been very positive in terms of delivering on time and on budget, so we will be seeing more of those coming soon. We see the opportunities in PPPs on both the investment and construction side. Whatever the government might decrease from its own budget will ultimately be made up by the private sector.
“Right now in Kuwait the infrastructure is being redone, and the scale of projects are much greater than they were previously. $50 million was a big project 30 years ago, now a big project is considered to be more like $500 million and over.
“Things have changed and the magnitude of our projects have changed. The scale for things like malls, we are currently doing a 600-metre extension to the one-kilometre mall; the avenues, the projects are much greater now.”
While infrastructure holds promise in Kuwait, Israel’s thriving start-up scene has produced dozens of companies that have gone on to become global brands. Science and Technology in Israel is one of the country’s most developed sectors.
“You don’t get large companies if you don’t have small companies,” says Eyal Waldman, CEO of Mellanox Technologies. “I think we need as many startups as there are. You don’t want to count every three guys that start a new application as a real startup, but I think the more opportunities, the more companies we start here, the higher probability of more success stories.
“Mellanox is an interconnect company,” Mr. Waldman explains. “We connect servers to storage. Our main market is building large supercomputers or high performance computing. We connect 50% of the largest supercomputers in the world, for many applications. We’re also in the database market, and that’s where Oracle comes in, it has a very deep understanding of the technology that we can provide. We lead in terms of products, technology, and we’re very fortunate that our products are always a generation or a generation and a half ahead of our competition, which adds to our success. We sell to companies such as HB, IBM, Dell, Oracle, EMC, Fujitsu, etc. And we also sell to most of the Web 2.0 companies, so nearly every time you touch your phone you go through Mellanox. Most of the cars you drive have been designed with computers that are connected with Mellanox. Most of the airplanes you fly have been designed with us. We’re also in a lot of government agency and military projects, fighting terror, and we’re helping a lot of entities do the right things in many cases.”
True to the engineering and technology roots of his firm, Mr. Waldman sees an increasingly interconnected future, one in which Mellanox’s products will be in demand. “The story is very simple, if you think of the world’s data, it’s growing exponentially, and every day there are more devices that are producing and consuming data. Your watches, your phones, your cars, your clothes, and to be able to process the data, store the data, you need a very high-speed interconnect. Our products are moving data the fastest on the planet, and that’s why we’re seeing more and more market share moving in our direction, because we can help people be able to do more, and when you can do more with your data, you can make more money. It’s a very simple equation.”
Israel’s technology sector has produced globally important companies, including firms like Netafin, which has brought a high-tech approach to the age-old problem of growing more and better food. “Netafim is not only about the product,” explains CEO Ran Maidan. “It’s our design capabilities and tools, our agronomic support, our service, our technology for monitoring and control systems. At the end of the day, it’s all about offering a system that produces more yields with less resources. It’s also about providing the right software. Think about drip irrigation as a delivery system. It’s not only about water. We started with just water, but now it’s a delivery system that will take your water, fertilizer and crop protection products directly to the plant’s roots in the most efficient manner. In the end, I’ll put in the software to automate it. All you have to do is plant your seeds, and you’ll get the best yields you ever had, while using 30% less resources. Less crop protection products, less fertilizer, less labour, less water.
“We combine everything together – investing in growth engines, investing in differentiation, creating the right culture, having the right people – and continue to maintain a strong passion within the company to create a better world, a better company, and a better product for our farmers. By doing that we’ll continue to win.”