The race is on for international institutions to take advantage of Russia’s burgeoning equities market, but the nuances of the country’s infrastructure could pose a number of difficulties, according to new research from consultancy TABB Group.
TABB’s new report, ‘Russian Electronic Trading: Alpha In The Tundra’, looks at the opportunities and risks facing international firms seeking to profit from the country’s rapid growth and gradual shift towards electronic trading.
The study highlights a number of issues, including: T+0 settlement, which inhibits low-latency trading; the time and cost required to transfer Russian securities held by registrars; and distrust in the ruble and uncertain capital gains rules, which may push many investors to settle in offshore accounts in dollars.
According to the report, the slow movement towards electronic trading by foreign firms in Russia is due to a lack of resources at international banks to solve these complexities, as well as caution over Russia’s market risk premium, which has prompted institutions to trade Russian stocks using depository receipts (DRs) listed on the London Stock Exchange’s (LSE’s) International Order Book (IOB). TABB reports that Russian DRs now account for 90% of the value traded on the IOB, up from 50% in 2004.
But “opportunity is knocking”, according to Adam Sussman, director of research at TABB Group and author of the report, who predicts that innovative brokerage solutions to circumvent Russian market difficulties will drive international asset management and high-frequency trading flow to 25% of Russian equity trading by the end of 2011, from 10% in 2009. Furthermore, TABB estimates that foreign and domestic electronic trading will climb to just over 10% by the end of 2011, compared to current levels of 3%.
“It is those [electronic trading] pioneers that will facilitate the next wave of investors, smaller-sized institutional and hedge fund shops to enter the market,” read the report.
The report also considers that the global financial crisis may have slowed down the progress of some banks looking to roll out new products and asset classes globally. Nonetheless, the asset management community in Russia is waking up to the cost and efficiency benefits of electronic trading.
“The future of Russian equity market structure is intimately intertwined with the future of electronic trading,” read the report. “The exchanges, depositories and brokerage community are being pushed to offer sponsored access, co-location and other requirements for low-latency trading. While these products address a small percentage of the trading community, the innovations created to support these players will eventually benefit other market participants, primarily institutional (and mutual) fund managers.”