Opening Up Gulf Coast Trading

Ian Salmon, Head of Enterprise Business Development EMEA for Fidessa reviews the dynamics of trading in the MENA region including DMA access and drivers of future growth.
The Middle East North Africa (MENA) markets appear set to embark on a recovery led by the attraction of investment within and into the region. We’re seeing demand for electronic access to these markets from both our existing western tier 1 customers, who are looking to offer their services in the region, and from local brokerages and banks looking to offer both DMA and retail access to the markets in a way that is safe and reliable. For now, at least, the services required by brokers in this region are order management, the ability to handle FIX flow and straight through processing (STP) with risk and portfolio management.
Two important factors come into play. First, electronic services accessible to market participants from outside the region require reliable communications and the adoption of FIX, together with risk and order management platforms locally to ensure secure and performant access. Obviously, there are a number of networks operating, and they all expect to receive orders via FIX. This is prompting the exchanges and their members to seek reliable pan-MENA communications and complimentary support services. Second, in order to service the needs of the local investment community, which is predominantly retail in nature, competent web-portal and risk capabilities are needed to facilitate pan-regional market access. This forms the backbone of the type of reliable web portals launched by NCB Capital, for example, which can feed into an OMS capable of supporting their 1.2 million retail customers and 250,000 concurrent users.
There are three main models for order flow in the MENA region. First, there is inbound traffic coming from large international firms employing strategies that take account of local trading restrictions. The local brokers are aware of this and are looking to offer FIX-based solutions for inbound order flow as well. The second is intra-regional order flow, where brokers within the Gulf Coast countries utilize their relationships to route orders between themselves and between their memberships. Finally, the third is outbound order flow, which is based on the attraction of ownership of foreign bonds and equities to local players, with local brokers going outside the region to trade these instruments.
In MENA, it is more often about a full-service offering. If a client is participating in a listing, the ability to participate on the market, make the market and trade client orders is more valuable for both tier 1, western banks that are participants in the market and for local institutions. For the most part, MENA market participants are looking to offer pan-MENA support, so as local brokerages they look to support bilateral agreements with other countries in the region, and again, FIX plays a critical role.
As for the drivers of growth in MENA, it is inevitable that I’m going to mention technology. Without a system to handle FIX and the risks that are associated with both retail and institutional flow, expansion in the region will be limited. The local exchanges are also playing an important role. Many of them are adopting a much more collaborative and innovative approach to collating their collective liquidity, allowing local brokers to leverage value from the intra- and extra-regional flow of orders.
In Qatar, for example, the markets are recovering and the banks are being offered brokerage licenses on the exchange. It is a competitive market, because they are offering innovation through algorithmic trading and DMA access to the markets, where there probably has not been that amount of choice before.
The regional requirements were something that we have had to overcome in offering managed services in the region. One such challenge is the physical location of the data. In markets like Saudi Arabia data cannot be hosted or transferred anywhere outside of the region. Also, if a MENA platform is being run from Europe, then that service must be available 24/7 to accommodate Sunday trading. This can be a challenge from a support, service and technical perspective. Commonly, we see our customers adopt managed platforms or separate instance platforms, to trade in the MENA region for two fundamental reasons: one, they have to physically locate a system in the region and two, they have to run a platform that is operating on different hours and days from their EMEA platform.
For many of our customers Sunday trading also means they have lost their window to take their systems down for maintenance. Many use a global order management, ‘follow the sun’ approach, where they run an EMEA, North American and Asia Pac platform that hands over at certain times. Some retain the window at the weekend to conduct maintenance, but many simply create a MENA-specific build, with a same look and feel, which then relates back their parent platform. It is efficient and it works. The demand for electronic trading solutions in conjunction with FIX certainly looks set to continue in this region.