The Future of Domestic Capital Markets in Developing Countries

Panel Summary: Approaches to Securities Trading

 Approaches to Securities Trading Ruben Lee, chair of the panel and managing director of Oxford Financial Group, opened the discussion by asking Emmanuel Zamble of the Bourse Regionale des Valeurs Mobiliers in West Africa why West Africa sought to create a regional exchange serving eight countries, one of the few places in the world where such a structure has been attempted. Zamble replied that the countries chose to create an exchange because the nations of the West African Monetary Union wanted to provide their citizens an opportunity to invest in their economies. They considered having eight national exchanges with linkages between them, but since only one of the eight members had an exchange, they decided to pool their resources into constructing a single exchange. Lee then asked Sergio Luiz de Cerqueira Silva of the São Paulo Stock Exchange in Brazil what he considered to be the greatest threat to his exchange. Silva replied the New York Stock Exchange (NYSE) is São Paulo’s toughest competitor, because 35 percent of trades in Brazilian stocks are conducted there. Does the Brazilian exchange have the capacity to process the 35 percent of trades currently handled on NYSE? If it does not, then Lee suggested that the NYSE in fact adds to trading in Brazilian stocks rather than detracting from it. Silva responded that such trading initially added to Brazilian stock liquidity, but that Brazil’s frequent economic crises fright-   ened investors, who subsequently chose to avoid the volatility of the market there. As a result, the São Paulo exchange is unable to maintain adequate liquidity, and thus he believes the NYSE clearly is taking business away from Brazil. What does the NYSE offer that the São Paulo exchange does not? Silva replied that companies listed on the NYSE prepare financial statements according to generally accepted accounting principles (GAAP). Lee then asked whether requiring Brazilian companies to report in U.S. GAAP would minimize the competitive gap between the two exchanges or whether the U.S. stamp of quality is truly the difference, so the Brazilian exchange would be unable to counter that difference no matter what steps it takes. Silva agreed that the implicit SEC stamp of approval of GAAP is vital, citing German firms that have to redo their statements to satisfy the SEC. He felt that, like Germany, Brazil is incapable of enforcing U.S. GAAP, although the quality of statements prepared under Brazilian GAAP is quite good. Unfortunately, foreign investors do not recognize that quality—or, presumably, the standards and concepts resulting in those statements—and this prevents them from effectively analyzing Brazilian companies. Lee directed his next question to Ravi Narain, chief executive officer of the National Stock Exchange of India. He asked why the National Stock Exchange, the second major exchange in India, was needed, and whether it is possible to continue having two major players in the country. Narain replied that the country’s twenty-two exchanges had been making no effort to upgrade their technology, improve trading practices, or integrate global benchmarks. Such stagnation led to a highly inefficient trading system and left a large gap for the National Stock Exchange to enter. There was a need, as is evident in the exchange’s ability to gain significant market share in a short period of time. When asked why the other exchanges failed to respond quickly to this competition, Narain replied that they had indeed improved themselves quickly at the start, but that their management lacked the ongoing drive for self-improvement. The other exchanges adopted best practices, but the National Stock Exchange went beyond this: it had a vision for itself in the future and moved quickly from integrating best practices to expanding into new products and segments and meeting more international benchmarks. It rapidly added new instruments and incorporated equity, then fixed income, then equity derivatives; it now is investigating interest rate and commodity derivatives. In effect, the    National Stock Exchange is attempting to remain three steps ahead of the competition. Lee asked Alfred Berkeley, vice chairman of Nasdaq, what he considered to be the greatest threats to the Nasdaq today. Berkeley replied that the greatest threat is regulatory arbitrage by brokerage firms licensed to perform market functions. These firms are not required to pay for regulatory inspections, and they are leveraging these savings to underprice the Nasdaq. The electronic communications network (ECN) Instinet is a prime example...