Trading costs do not have to be higher in emerging markets

Published on 31 August 2018

Trading costs do not have to be higher in emerging markets, says Mark Denny, head of dealing for global markets at Investec Asset Management. He gives us an update on the last quarter, with a masterclass in how to build relationships and electronic trading capability in EM, to deliver best execution.

Dan Barnes Welcome to Trader TV Equities – your insight into the trading climate for professional equity investors. I’m Dan Barnes. In August’s show, we’re talking with Mark Denny, head of trading for global equities at Investec Asset Management, about trading of emerging market stocks in recent months. Mark, welcome to Trader TV.

Mark Denny Thanks, Dan. It’s great to be here.

Dan Barnes So I’d like to start by asking you, what sort of activity have you seen in emerging markets over the last quarter?

Mark Denny Clearly from an EM perspective, we’ve had one or two bumps in the roads; Russia, not least Turkey more recently, perhaps. So I think looking back to the beginning of the last quarter, you know, a fairly smooth ride, but now starting to become a little bit more rocky. I think that headwind’s are going to continue now.

Dan Barnes When you’re trying to manage the costs of trading and the value that the trading desk provides, how is that impacted trading EM vs DM?

Mark Denny Certainly from an explicit cost perspective – in other words, you know, brokerage fees – the emerging markets are a little bit more expensive than trading the developed markets. There’s two key reasons; the emerging markets are less developed with regards to direct electronic trading, where trading is obviously more efficient and potentially cheaper. And I mean, there are a lot of emerging markets now that have actually opened up their doors to electronic trading, so that is a trend that’s improving. But also access to the emerging markets; often, investors may not have direct access to the exchange or local counterparties, so they’re perhaps engaging with an investment bank, who then introduces a chain of access into that market. And that starts to make the costs of actual execution, final execution relatively high. You’re paying investment bank, you’re then paying another local broker, and then you could be paying a second local broker potentially as well within that equation. To be honest, I think that’s starting to become more efficient now. I mean, certainly from our perspective, one of the key things in order to keep these costs under control – as well as the explicit costs, you’ve got implicit cost as well, so in other words, your footprint in the market or your market impact. So in order to try and minimize both of those scenarios, we’ve developed relationships with local counterparties, and there are now more local counterparties who we feel confident trading with and investing for our clients through. So kind of missing out one or two parts of the chain perhaps, and also engaging on electronic trading where we can. I think that’s probably relatively still primitive, but it’s still improving.

Dan Barnes So it’s very interesting. So you have two parts, one is the ensuring that you’re engaging with electronic trading where that is possible, but also very much developing those relationships as the trading desk. And this is, of course, where you need an explicit trading function, so that you can work out where liquidity is, where to find the best pricing information.

Mark Denny Emerging markets, of course, don’t have anything like the kind of fragmented liquidity sources like we do in the US and in European markets, where you have multiple trading venues in order to access, but even access to those venues in the US and Europe is obviously very efficient electronically these days. So, you can actually access multi venues quite easily. I think from an EM perspective, there’s nothing like that kind of fragmentation that we see in Europe and the US. The majority of liquidity that you will access will be on the primary exchange, particularly across the LATAM and the Asian markets. So, in order to minimize impact or footprint in those markets, if you are introducing a sort of multi-chain access to your final destination, your noise, your footprint in the market, and your information leakage is potentially increasing as you go through each of those stages. So, one of the key things is to access directly to where you can, to a local counterparty. And having chatted to my trader in Asia on some of the Asia EM markets, what he was saying was,  the brokers that have access to these markets have very, very good knowledge around the holders of the securities, and often the securities are held quite tightly, so not across multi institutions. So, in order to to get to your final destination of sourcing natural liquidity, i.e hiring a broker to talk to a client who they know owns the security, it’s arguably more of an efficient process, because you are keeping your market leakage to a minimum, because you’re actually accessing liquidity quite efficiently.

Dan Barnes So what are your expectations for emerging markets over the next 12 months?

Mark Denny Certainly from a trading perspective, we do expect to be engaging more and improving our electronic trading access into the liquidity venues across emerging markets. So, that’s something that will hopefully make us a little bit more efficient in accessing those markets and hopefully start to bring explicit trading costs down a little bit. I think from an environmental perspective, it’s quite clear right now there’s a little bit of headwind as we’re moving forward, as I’m speaking to you now. Not only from a US perspective, because there we’re quite easily caught out with Russian sanctions fx, and all of the activity that’s going on around trade negotiations. Markets have obviously induced a little bit more volatility just over these last few weeks. It feels like things, in the slightly short term, has settled a little bit, but I think we’re probably going to move into a little bit more volatility, perhaps.

Dan Barnes Mark, thank you very much.

Mark Denny Pleasure. Thank you, Dan.

Dan Barnes I’d like to thank Mark Denny of Investec Asset Management, for his insights into trading emerging markets, and of course you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.