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Connectivity Booms in Emerging Markets

As asset flows chase hot returns in emerging markets, global order-routing networks are increasing connectivity.

High-flying emerging markets that are producing double-digit returns are luring buy-side assets to places as far flung as Latvia and Vietnam that once were considered too risky. Experts say that in addition to providing high returns, investing in emerging markets has become easier thanks to more-stable economies, advances in order-routing technology and the easing of some regulations.

"A lot of the exchanges and emerging markets have made huge progress. They are on par with the latest technology [and] they connect with FIX," says Philippe Buhannic, CEO of TradingScreen, whose execution management system (EMS) helps buy- and sell-side firms execute orders in emerging markets. "Also, the clearing systems have been improving and transparency of the markets has been improving, so risk is less than it used to be," he adds. "So people are more comfortable [trading in those emerging markets]."

As demand for investing in emerging and frontier markets picks up, buy- and sell-side firms are hunting for networks and trading systems that allow them to operate in foreign markets without necessarily being experts in the local rules themselves. Traders are seeking a range of services, including connectivity, market data, direct market access (DMA), trade-cycle monitoring, selection of clearing firms and settlement tracking.

"Platforms are getting more sophisticated -- technology is improving," comments Stephen Wood, a portfolio strategist with Russell Investment Group in Tacoma, Wash. "There's a greater ability to do more at more attractive costs."

Eyeing an opportunity, global order-routing networks with access to emerging markets are expanding their services beyond networking. They're hooking up with front-office trading systems, supplying 24-hour trade-support desks and offering research partners that can provide local market intelligence.

"In the last two years, emerging markets have made quantum leaps," says Peter Gaffney, president of AXES, an agency broker that has worked with its parent, Auerbach Grayson & Co., to develop an extensive network of foreign brokers in 104 countries, ranging from Brazil to South Africa. The brokers have memberships on more than 250 equity and equity derivative exchanges worldwide, according to AXES.

"You're getting electronic access and trading desk capabilities, which includes research, speaking with our partners overseas and understanding what is happening from a country or regional perspective," says Gaffney. "Whether you're investing in Montenegro, Botswana, Lebanon or Kuwait," AXES can put clients in touch with market intelligence on the ground, Gaffney says.

Connecting the Dots

Vendors say the cross-border connectivity frenzy is driven by requests from both buy- and sell-side firms that want to find counterparties in new markets. Executives at global order routing network Thomson Order Routing -- 23 of whose 400 destinations are in emerging markets -- say they have seen a substantial amount of growth in the Middle East, Latin America and South Africa.

"Latin America is an area where we made some recent wins, and it reinforces our global presence," says Oliver Hugh Jones, head of Thomson's equity businesses in Europe. Further, he notes, two major global institutions asked Thomson Order Routing to provide connectivity to brokers in Dubai and Abu Dhabi. "In South Africa, it was very much driven by European institutions to connect to the South African brokers," Hugh Jones recalls. "Once that connectivity was established, then the brokers in South Africa looked to extend their reach to specialist brokers outside the region."

In Latin America, another of Thomson's clients, the Mexican broker Finamex, asked the global order routing network to look for partners in Europe. "We're setting up meetings with various buy-side [firms]," says Mark Hinchcliffe, a member of the Thomson connectivity team in Europe. "We're acting as a partner for these firms -- they're getting much more value than connecting onto a network," Hinchcliffe contends. "Other players in the market don't offer that."

Other connectivity providers are enhancing the value of their services by addressing the clearance and settlement process. "The one thing that sets us apart from the other groups is that we layer over settlement support services on top of [a FIX] network," says Cody Callahan, EVP of Tradeware Global Corp., which operates a FIX order-routing network that provides connectivity to brokers in more than 54 markets. "By its very nature, processing international trades or cross-border trades has been historically incredibly expensive," Callahan says, claiming that Tradeware can cut the cost of processing international trades by 80 percent.

Hoping to tap the order flow from emerging markets, exchanges also are partnering with global order-routing networks. In July 2006, for example, NYSE Group took a minority investment in Marco Polo Network, an electronic broker-neutral platform that covers 54 countries around the world and has customers on both the buy and sell sides.

"We offer a multitude of access points," relates Vinode Ramgopal, CEO of New York-based Marco Polo Network (MPN), which routes orders electronically to brokers as well as exchanges and supports DMA orders wherever the markets permit it, he says. Wherever the markets don't support DMA, "There are full STP processes," adds Ramgopal, explaining that the order "goes straight from one system to another without any manual rekeying of data." He points out, however, that "There are regulatory requirements to make sure that the order is seen, viewed and previewed before it is sent on to the exchange. We call those light-touch DMA markets."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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