The World Federation of Exchanges (“WFE”) has published a research report into how exchanges can enhance retail investor participation in emerging markets.
The federation which represents more than 200 market infrastructure providers including exchanges and CCPs in its report reviews existing academic literature on the subject, and analyses data from 14 emerging market exchanges to assess what levers impact levels of retail trading. It looks at a variety of factors, such as transaction costs, tax rates and financial literacy programmes, and how these factors affect the breadth (number of individuals investing) and depth (level of trading activity in number of trade and value traded) of the retail investor pool. The report also contains several case study interviews that support and expand the results of the statistical analyses.
The key findings of the report can be summarised as follows:
Macroeconomic and jurisdiction-specific factors matter: In particular, the report finds that increases in interest rates have a strong negative influence on both breadth and depth of retail trading. Moreover, in a high interest rate environment, a further increase in rates results in a decline in the number of retail trades, or depth. In addition, GDP growth rates and retail participation are positively linked, with countries with higher GDP growth rates showing a greater level of retail trading.
Changes in cost-to-trade impact retail participation, not transaction costs: The report suggests that reductions in exchange trading fees alone do not spur retail participation, unless they result in a reduced cost-to-trade for the retail investor. Similarly, increases in cost-to-trade, such as clearing fees, do negatively impact the depth of retail activity.
Financial literacy programmes matter: The report finds a positive relationship between financial literacy programmes, such as trading games and training courses, and both breadth and depth of trading.
The starting level of retail participation impacts the importance of cost-to-trade and literacy programmes: Financial literacy programmes seem to be proportionally more effective in increasing depth and breadth of retail participation in markets with lower starting levels of retail participation, whilst reductions in cost-to-trade impact the depth of retail activity in markets with relatively higher levels of retail participation.
Nandini Sukumar, CEO, WFE said: “Exchanges value the participation of retail investors in their markets, and are engaged in a variety of initiatives to enhance this participation. They also clearly understand the importance of coupling such participation with appropriate financial literacy programmes.”
Siobhan Cleary, Head of Research & Public Policy, WFE added: “What is clear is that the breadth and depth of retail trading is impacted by various factors: macroeconomic indicators, in-country characteristics, cost, and financial education. Exchanges wishing to enhance retail participation may be able to address these final two levers, but ongoing work with regional stakeholders to build a strong and resilient market that caters for different investors must also be a key aim.”
The report included data from, and case study interviews from a subset of, 14 emerging market exchanges including: Amman Stock Exchange, Bolas de Valores de Colombia, Bursa Malaysia, Colombo Stock Exchange, Dubai Financial Markets, Indonesia Stock Exchange, Kazakhstan Stock Exchange, Moscow Exchange, Muscat Securities Market, Philippine Stock Exchange, Stock Exchange of Mauritius, Taipei Exchange, The Egyptian Exchange and The Stock Exchange of Thailand.
The WFE’s Emerging Market (EM) Working Group includes 24 members, whose role it is to develop relevant learning and information-sharing sessions for EM exchanges, and to propose EM-relevant research topics. Other recent research includes a joint report with Oliver Wyman focused on enhancing liquidity in emerging markets.