Emerging Markets and International Securities Exchanges - dummies

Emerging Markets and International Securities Exchanges

By Ann C. Logue

If you’re going to buy emerging-market stocks and bonds, you need to know a little bit about how they’re traded. Traditionally, a security is traded on an exchange, which is an organization set up to allow people to buy and sell. Exchanges grant trading privileges to different brokerage firms so that they can execute orders for their customers.

The alternative to exchange trading is over-the-counter trading, in which networks of buyers and sellers find one another in order to get trades done. Over-the-counter trading is most efficient for large, well-known businesses.

Often, securities are listed on more than one exchange. Because dual-listed securities have to meet the exchange-listing requirements on every exchange, investors often prefer them to other emerging-market securities. After all, the more listing requirements a company has to meet, the more information about it is in the market that investors can use.

You don’t necessarily need to have a brokerage account in the country where you trade. Many major brokers in developed markets have exchange membership or trading privileges all over the world.

Looking at regulations

Securities exchanges are often for-profit businesses that need to generate a return for shareholders In order to ensure that they function, they’re regulated:

  • From the national government: The government will almost definitely have basic rules for how exchanges operate. The regulatory body may be the central bank or a dedicated regulatory agency. It sets and enforces rules on how much information companies need to give to investors, how quickly trades are settled, what types of trades are permitted, and what qualifications brokers have to meet.

  • From the exchange’s internal regulation process: The exchange will have rules for the standards that companies have to meet in order to be listed, for trading hours and procedures, and for obtaining permission to work as a broker or trader on the exchange. If you’re investing in a country where the laws are weak, the exchange’s governance structure should be more important to you.

Trading on material nonpublic information, also known as insider trading, is legal in some countries, clearly illegal in others, and illegal but subject to lax enforcement in some. Keep in mind that you may well be buying or selling against people who have more information than you do.

Getting accurate price quotes

In actively traded markets, especially those in developed economies, prices more or less go up when the news is good and mostly go down when the news is bad. In emerging and frontier markets, though, prices may not reflect all the information about a company’s prospects. For that matter, the prices you see before you place orders may have nothing to do with the prices you receive when your orders are executed. The markets may not have the trading activity needed to force prices to respond to information, or there may be limits on the types of information that different people receive.

Evaluate the quality of the prices in a market by

  • Checking the Web site of the country’s stock exchange to see how often its prices are updated. The less often a trade takes places, the less accurate the prices are. If the exchange doesn’t have a Web site, you probably aren’t going to get accurate quotes no matter where you look.

  • Looking for the size of the spread between the bid and the ask. The spread is the difference between the bid and the ask. The wider the difference between these two numbers, the less often the stock trades — and the less accurate the price quote is likely to be. Your offer will move the price, and probably not in your favor.