A new study from Acuiti suggests that the adoption of trading in emerging markets from hedge funds, proprietary trading firms and bank trading and execution desks is set to grow significantly as firms look to diversify trading strategies, seek unique opportunities and broaden exposures.
The report, published today in partnership with BSO, found that more than half of surveyed firms have definite plans to venture into a new market within the next three years. Additionally, one-third of the participants are actively considering expanding into new markets.
Hedge funds and proprietary trading firms, in particular, reported looking for new markets to trade in which they can deploy their strategies and expand operations.
However, while secondary and tertiary markets have made significant advances over the past decade to improve the connectivity process for international trading firms, it is still an onerous process at many exchanges.
This is reflected in the time it takes to connect to a new market. Most survey respondents reported the timeframe for connecting to new markets once the decision has been made to connect as stretching to seven months or longer and that the timeframe for adoption was increasing.
In addition, firms reported several challenges connecting to new markets. The cost of market data was the most significant barrier to entry for firms with connectivity costs, and preferred brokers providing access also being key barriers to entry.
When it came to which regions firms were planning to trade, Asia and the Americas were the top choices selected by 76% and 67% of respondents, respectively. In Asia, Taifex, KRX and HKEx were the top markets firms were looking to start trading, while in The Americas, firms reported interest in Brazil, Mexico and Chile.
“The decades long trend towards globalisation of trading strategies is accelerating as the infrastructure and technology of emerging market venues improve at the same time as firms look to expand their strategies beyond their traditional markets,” says Ross Lancaster, head of research at Acuiti.
“While the trading opportunities are attractive, the operational lift of connecting to these new markets can take months and, frequently, longer than a year. This is leading many firms to work with third-party providers.
“These vendors often have long-standing expertise in the markets that firms want to enter and established connectivity routes. In addition, they can significantly reduce the time to market to ensure that opportunities, once identified, can be captured.”
The report, based on a survey and a series of interviews of senior executives at 76 proprietary trading firms, hedge funds and bank execution and trading desks, also found that latency has become increasingly important for firms, even those that do not rely on speed for their strategies.
Michael Ourabah, CEO and founder at BSO, said: “The accelerating trend of globalising trading strategies is driven by the improving infrastructure and technology of emerging market venues, coinciding with firms’ aspirations to expand beyond their traditional markets. Connecting to new markets involves inherent risks in terms of costs and opportunities. However, by collaborating with third-party providers, firms can mitigate these risks, reduce costs, minimise time-to-market, and leverage their expertise in the new market. With BSO, businesses no longer face the dilemma of prioritising between global reach and low latency, just as they shouldn’t compromise on choosing between cutting-edge technology or exceptional service, bespoke solutions or off-the-shelf products.”
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