How can emerging market exchanges capitalise on the global boom in listed derivatives trading?

Global listed derivatives markets are booming. In the first half of 2024, volumes on global derivatives markets reached almost 100bn contracts traded, up 76% on the same period in 2023, which was a record year for derivatives trading, according to data from the FIA.

For emerging and frontier market exchanges this presents a huge opportunity for growth. These exchanges tend to have vibrant retail markets and offer exposures to asset classes, instruments and indices that international trading firms can’t get elsewhere.

Over the past decade, several emerging market exchanges have transformed their businesses through capturing a significant expansion of flows from international trading firms. Many more are seeking to emulate those successes.

Acuiti and EP3 by Connamara Technologies recently partnered on a research project designed to understand how emerging and frontier market exchanges were approaching opportunities in the global listed derivatives markets.

We found that the opportunity was there for the taking. Of the Tier 2 and 3 international exchanges that we surveyed, 91% had seen growth in the number of participants over the past decade with over half reporting significant growth.

These firms had had to overcome several barriers to achieve that growth from international participants. Most had also had to invest in technology. Indeed, over nine in 10 respondents from tier 2 and 3 exchanges said that investment in technology had been either crucial or very important to their growth.

The experience of these markets offers lessons to emerging and frontier markets looking to attract international investors to their shores.

The survey found that the importance of investment in technology was under-appreciated by many exchanges. Overall, just a third of the emerging and frontier market exchanges that took part in the study thought investment in technology was crucial to their ability to attract international market participants.

In contrast, 61% of tier 2 and 3 exchanges that had achieved that growth said that investment in technology was crucial to attracting international flow.

Approaches to investment in technology will be a key differentiator for exchanges seeking to harness international growth.

The study found that there are significant benefits to be gained from investment in technology, from reducing the risk of outages to the ability to launch new products and services.

For frontier and emerging market exchanges, another key requirement is to make the onboarding process as simple as possible for international firms.

Exchanges that took part in the study reported numerous challenges when it came to attracting international flows, from the time taken to understand the local rules and regulations to making firms aware of the products and opportunities on the market.

International firms have limited bandwidth when it comes to connecting to new markets and firms will evaluate both the opportunity on the exchange and the ease with which that opportunity can be harnessed.

Anything that emerging and frontier market exchange can do to ease that process will stand them in good stead when it comes to attracting more firms. Adopting technology that already powers other markets and is built to international standards is a key area in which firms can lower the burden of onboarding.

To find out more about how exchanges are approaching international growth, where they are investing and the approaches they are taking to that investment, visit: https://www.connamara.tech/building-competitive-exchange-technology-report/