Trading in emerging markets via algorithms is ripe for growth but further adoption of electronic trading practices will depend on changes to trading rules and exchange functionality.
The findings are part of new research from Credit Suisse’s Advanced Execution Services division, which looked at the microstructure of markets in the Czech Republic, Israel, Poland, Russia, South Africa and Turkey and the potential for algorithmic trading growth in each market.
Considering central and eastern European (CEE) exchanges in particular, the study noted while 60% of buy-side traders make use of algorithms in selected markets, 86% of investors still use cash desks as the primary or only means of accessing CEE stocks.
In the six markets analysed, average daily turnover of equity trading was US$4.8 billion – 93.2% of which was accounted for by South Africa, Turkey and Russia – compared to US$34.8 billion in developed Europe.
Looking to the liquidity characteristics of individual stocks in the markets analysed, Credit Suisse found most had bid-ask spread and turnover profiles similar to mid- and small-cap constituents of the Euro STOXX 600, with the exception of some Russian stocks and global depository receipts, South African equities and Polish stocks, which resembled large Euro STOXX 600 names. While the liquidity profile of some Turkish stocks had turnover levels similar to larger Euro STOXX 600 names, spreads were found to be significantly wider because of larger tick sizes.
Unpredictable liquidity
While opportunistic tactics were favoured in the six assessed markets – due to the relative instability of volume profiles compared to developed European markets – the research noted scheduled-based strategies like VWAP were becoming more common in South Africa and Israel, where liquidity can be more steady.
To encourage further use of algorithms in the Czech Republic, Turkey and Russia, Credit Suisse said certain trading nuances first needed to be addressed.
In Russia, the study said the move to a T+2 settlement regime in March 2013 – from the current T+0 regime which requires trades to be pre-funded before they can take place – would encourage further use of electronic trading tools, as would the recent classification of the National Securities Depository as a central securities depository and potential introduction of a closing auction in January 2013.
The ability to cancel or modify orders on the Turkish exchange was seen as positive, but Credit Suisse believed further changes, including a further reduction of tick sizes and the removal of maximum order size constraints, would be vital to further algo trading growth. Meanwhile, according to the Swiss bank, the Prague Stock Exchange was moving in the right direction with the impending rollout of Deutsche Börse’s Xetra platform, which would also solve an issue related to the differences between trading round lots and odd lots.