Growing liquidity should be a priority for emerging market exchanges as it fosters broader market and economic development.
The WFE recently published a report into growing liquidity in emerging market exchanges, in collaboration with global management consulting firm Oliver Wyman.
The report, entitled Enhancing Liquidity in Emerging Market Exchanges, was designed to provide regulators and exchange operators in emerging markets with ideas around how to grow and enhance market liquidity - liquidity levers - and a potential framework for which of those levers may work best at which stage of market development.
Many emerging markets suffer from low levels of liquidity, effectively placing a constraint on economic and market development. Liquidity is positively associated with broader market development, and often creates a virtuous circle, resulting in encouraging effects for the underlying economy.
The report identified three key areas that exchanges and regulators can focus on to grow liquidity, with each area having a number of corresponding liquidity levers:
- Promoting the development of a diverse investor base.
- Increasing the pool of securities and associated financial products.
- Investing in the creation of an enabling market environment.
Through the use of relevant emerging market exchange case studies at varying stages of development (including the Philippines Stock Exchange, the Stock Exchange of Thailand, BM&FBOVESPA and the National Stock Exchange of India) - to highlight practical experience with these levers - the report outlined how each exchange has addressed and implemented some of the highlighted mechanisms. It also served to show there is not a one-size-fits-all solution; the effectiveness of a lever will depend both on the dynamics of the particular market, and on how well it is implemented.
The report was written in collaboration with Oliver Wyman, using its experience in a variety of markets, and WFE data, supported by interviews with, and case studies of, a number of WFE emerging market exchanges.