Bolsa Mexicana de Valores

The rich promise held by emerging economies may have would-be investors salivating, but without sufficient technology or regulatory capabilities it is difficult for Western companies to take advantages of these opportunities.

It has been 10 years since Jim O’Neill introduced his memorable BRIC (Brazil, Russia, India and China) economic grouping. The term has since been branded into the financial community’s collective conscience as its constituent members developed at a pace which even Mr O’Neill might have struggled to predict, while growth in the West slumped amid harsh economic conditions.

As a result, competition for a piece of the 'big four' has intensified and money-making opportunities are harder to come by than they once were. In response, banks and investors are looking further afield, and seeking to forge links with other emerging financial centres positioned for growth. Some eyes are cast towards Robert Ward of the Economist Intelligence Unit’s Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), others look elsewhere in Asia, Latin America or eastern Europe as well as the well-developed but sometimes thorny Middle East or the untapped potential of much of Africa.

In many of these regions, regulators, stock exchanges and banks are making great efforts to court potential investors, opening up markets and promoting themselves relentlessly. But before ploughing money into a country – whether it be through a physical presence or trading on a stock exchange – financiers must be sure that they can do business efficiently and reliably. A large part of achieving that rests on one crucial variable: technology.

Basics first

What will it take for a local hub to become a viable player on the international stage? At the most basic level, any country looking to attract investment requires swift and dependable connectivity to the broader financial community, a strong telecoms network and in most cases data centre space available for rent.

For Hamish Purdey, CEO of trading software provider Ffastfill, distributing a global network in various emerging markets is a crucial part of his firm’s business model. It is a task for which capacity in high-tech data centres as well as reliable communications infrastructure is absolutely vital. However, these fundamentals are by no means a given, even in some large countries. “Getting into the emerging world with reliable data centres which are up to Western standards can be challenging," says Mr Purdey. "We still don’t have a presence in China for that reason.”

Getting into the emerging world with reliable data centres which are up to Western standards can be challenging

Hamish Purdey

Even when these services and resources are available, they are not always particularly affordable, he adds. “The communications networks and technology we use in the West don’t exist everywhere, so getting reliable 100-megabyte connectivity is both difficult and expensive… The emerging world is great but at times it’s a very costly place to do business.”

Even when some systems are in place, there can be concerns about their quality. And fears over sub-par infrastructure could deter international investment, says Marco Casartelli, CEO of mobile financial services platform provider Vipera, highlighting recent large-scale ATM fraud in the United Arab Emirates. “That was very clearly a lack of quality and skills in deployment and management,” he says. “There is often a lack of standardisation and infrastructure [in emerging markets] which meet the standards of operating in more developed markets.”

Taking stock

In today’s electronic trading age, modern exchange platforms are similarly important to attracting international investment; it is hard to imagine any country with a national exchange still reliant on open outcry trading or even a dated electronic platform ever moving beyond a position of, at best, regional minnow.

As a result, many emerging market exchanges – having observed the boosts in liquidity, volume and efficiency that automated trading has produced in US and European markets – are now upgrading their trading infrastructure and forging links with international brokers and connectivity providers in an attempt to attract new market participants.

Mexico’s BMV exchange, for example, embarked on a technology growth plan five years ago. Partly to deal with exponentially increasing trading volumes – which are 50 times larger than in 2006, and have grown by a factor of four this year alone – and partly in an attempt to appeal to the international trading community, according to BMV's senior vice-president of technology, Enrique Ibarra.

The exchange has made significant investments in the project, upgrading its network infrastructure and opening a new data centre. It is now putting the finishing touches to a state-of-the-art trading engine – boasting an average response time of 100 microseconds – which is currently in the testing phase and planned to be up and running by April 2012.

It also employs a private network – managed in conjunction with telecommunications company Telmex – for its broker community, offering bandwidth on demand of between four and 100 megabytes. Reliability and protection should be safeguarded; Telmex classes it as a “national security network”, says Mr Ibarra.

Regulation needed

But it takes more than an exchange to make a market, and the latest technology is meaningless for international traders if doing business is fraught with regulatory or compatibility issues, says Sriram Padmanabhan, assistant vice-president and group manager client services with global technology services company Infosys. “You need a basic infrastructure first – networking and telephony and the like – but you also need a regulatory framework. In order to be a big player and to attract the same types of firms operating elsewhere – such as brokers and asset managers – you must be connected to other markets in the world, but also using the same standards.”

“It is never only about the technology side,” acknowledges Mr Ibarra. “You can have the best network, but if you have horrible rules it doesn’t mean anything. [At BMV] we wanted to make sure that functional features and rules were attractive and suitable for foreign investors, to lower barriers for entry for international participants.”

It is never only about the technology side. You can have the best network, but if you have horrible rules it doesn’t mean anything

Enrique Ibarra

As a result, BMV teamed up with Mexico's authorities and broker-dealer association to work on the country's regulatory framework and bring it in line with more developed markets, even as it upgraded its technology. These measures included establishing FIX electronic communications protocols and removing market quirks such as a 20-second wait when crossing, which Mr Ibarra said “scared” foreign traders. “Standardisation of functions is necessary. This will be our system for the next 10 to 15 years and we’re hoping our technology and regulatory efforts will make us attractive,” he adds.

Rethinking regulation

In Russia, the soon-to-merge Moscow Interbank Currency Exchange (Micex) and Russian Trading System (RTS) exchanges have been courting international electronic traders. But here too, addressing regulatory concerns is at least as important as upgrading technology, says Sergey Zamolotskikh, executive board member and head of infrastructure with RTS.

“We need to combine our efforts with Micex to develop our technology and we need to organise technology and communications links with foreign clearing houses and exchanges, so we are more represented in the current exchange and financial landscape,” he says. “However, we also need to improve our regulatory standards and our transparency in order to reassure foreign customers.”

Regulation may not at first sight be a technology issue, but enforcing it certainly will be, says Mr Padmanabhan at Infosys. The regulatory framework then needs monitoring technology to implement it, such as business intelligence software and data mining.

When it comes to technology, not every market will have every piece of the puzzle. In many African regions, where there is often a real desire to get involved in international finance, infrastructure is still evolving and emerging. Connectivity is often below the levels boasted elsewhere in the developing world, and in some cases a reliable power grid is by no means a given.

The Arab world, on the other hand, generally boasts high standards of technology, but if often waiting for regulatory sophistication to catch up, according to Mr Padmanabhan. Much of Asia is in the same situation, particularly on the trading side where inflexible legislation and market quirks are likely to put off the electronic trading community.

Regardless of the location, however, all of these pieces must be in place if a given territory is ever to be seriously considered as a viable centre for international financial operations. And given the potential rewards, it would be foolish to ignore any single portion. 

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