Earlier this month I had the privilege of speaking on a panel at the WFE Annual Meeting focused on retail participation in the public markets, writes Alexander Afanasiev, CEO, Moscow Exchange.
It was a robust discussion with senior representatives from CME Group, Dubai Financial Market and the Stock Exchange of Thailand. Below are some of my impressions.
First, the task of reaching retail investors is fundamentally different in developed versus emerging markets. In developed markets you can sell securities to retail investors; in emerging markets, we are selling the securities market. Emerging markets are generally much less penetrated markets for retail investment and the level of financial literacy is also much lower. In emerging markets the buy side institutions that serve as a conduit for retail investment in the public markets – pension funds, insurance companies, mutual funds – are less developed.
The issue of financial literacy is crucial. Particularly in emerging markets, the population frequently doesn’t have the background knowledge to make investment decisions with confidence – or in some cases even the awareness that they can participate in the public markets. Even in developed markets, financial literacy is an issue. Chris Fix from CME Group mentioned for instance that leverage is not for individual investors, noting, “You should not have what you do not understand."
Various exchanges go about addressing the question of financial literacy in different ways. The Stock Exchange of Thailand (SET) has established the Thailand Securities Institute that educates investors and the general public – including young people, university students and company employees – on how the public markets work and how to get involved. Educational initiatives are carried out in cities across the country, not only in the capital.
Moscow Exchange hosts a MOEX School for investors, runs a number of challenges and contests throughout the year, and hosts seminars and conferences in major cities. We also host a series of webinars that tend to draw younger retail investors.
Every year CME hosts a four-week electronic trading competition where teams of undergraduate and graduate students can trade a variety of CME Group products from multiple asset classes in a simulated trading environment on a real-time professional trading platform. More than 200 universities globally participate.
Some emerging markets have more of a track record of working with retail investors. The Dubai Financial Market (DFM) initially started as retail market, and institutions followed later. Institutional investors own the bulk of the listed market (more than 70% of total market capitalisation), but retail investors dominate trading activity, representing around 70% of value traded. DFM has focused on ensuring retail participation in IPOs, with between 10,000 and 300,000 retail investors buying shares in some IPOs.
DFM notes that access to information is key for retail clients, and it offers real-time market data to retail investors free of charge. In Thailand market data and information is easily accessible and low cost. At Moscow Exchange Group we have launched a corporate information centre that translates information directly to retail customers.
In addition to transparency of market data being important, it is also important that issuers are transparent. The Stock Exchange of Thailand promotes corporate governance standards and education of listed companies. They invite listed companies to come directly to the exchange and speak about what they are doing and comment on quarterly and annual results. At Moscow Exchange, we also have a strong focus on good corporate governance. When there is a misuse of information or bad corporate governance practices investors don’t quickly forget. Retail investors have long memories.
Finally: technology has improved in recent years. Electronic trading is now nearly universal and retail investors can trade directly via DMA platforms and the like. At the same time my observation is that regulation has not changed much and needs to be adjusted to the new reality. Exchanges are overregulated, in my view, while trading platforms are not regulated enough.