Enhancing Liquidity in Emerging Market Exchanges

Many emerging markets suffer from significantly low levels of trading venue liquidity, effectively placing a constraint on economic and market development. In our joint paper with the World Federation of Exchanges we discuss how exchanges, regulators, and capital market participants can take action to grow liquidity, improve the efficiency of trading, and better service issuers and investors in their markets.

Cyclical benefits of market liquidity

Higher liquidity creates a virtuous cycle with positive spill over effects for the underlying economy.

The importance of market liquidity and its relationship to financial marketdevelopment can be understood by examining the impact on variousmarket actors:

  • For investors, more liquid markets are associated with lower costs of trading, an ability to move more easily in and out of assets, lower price volatility, and improved price formation.
  • Issuers are attracted to more liquid markets, as they reduce the cost of raising capital and produce more accurate share price valuations.
  • Stock exchanges value the increased attractiveness to issuers and investors, as this translates into greater use of the market, greater confidence, greater ability to attract new stakeholders, and greater ability to do business, which drives revenues both directly (through trading fees) and indirectly (through extending their product offering, for example).
  • Economies as a whole benefit, with companies able to access capital at a reasonable cost, subsequently increasing investment in their business and driving increased employment and their overall contribution to the economy.

Enhancing Liquidity in Emerging Market Exchanges