For exchanges and trading venues, liquidity is the name of the game. The L word is what matters; it is the reason why companies seek out certain exchanges to list on, and it is why investors and intermediaries flock to exchanges. A virtuous cycle of sorts is at play. Higher liquidity levels lead to higher valuations of listed securities. This, in turn, attracts more listings, which attract more investors and intermediaries, fueling even higher liquidity levels.
A traditionally stratified sector, the exchange world has gone through seismic changes over the past couple of decades. The amalgamation of otherwise discrete liquidity pools across geographic and product boundaries saw the creation of international liquidity streams. Nasdaq Group, Euronext, ICE / NYSE, and the more recent Swiss-Spanish exchange merger are examples of successes. Deutsche Börse’s attempts at expanding its liquidity pool via mergers and acquisitions, and the repeated interests in the London Stock Exchange by several suitors are examples of efforts that did not go far.
Liquidity consolidation will continue to be the modus operandi of exchanges for the foreseeable future. This is not only because of the virtuous cycle referred to above but also because revenues generated by exchanges from the sale of information and information-related services are growing by leaps and bounds. For some stock markets, these revenue streams have eclipsed those generated by cash equities trading. And what better source of raw information and data that can be packaged into multiple products and sold to end users than a trading space – the more trading in more financial securities and products across multiple geographies, the more information generated.
In many countries, particularly developed economies, stock markets have corporatized, becoming shareholding companies listing their shares on their own, and other platforms. This development has been a major facilitator of liquidity consolidation, realized through exchange mergers, acquisitions, and cross shareholdings. For other countries and stock markets that have not gone through this transformation fully yet, such as those in the MENA region, the question is: what awaits?
In other words, given that liquidity consolidation is the current operating business model for stock markets and trading venues worldwide, what future strategies will MENA exchanges pursue to better serve their listed companies, investors, financial service providers and, ultimately their economies?
To answer this question, one is tempted to first view the capital market landscape in the MENA region. Although geographically contiguous, when it comes to the level of capital market development, MENA can be viewed as a collection of sub-regions. The Gulf Cooperation Council (GCC) countries and Egypt are the more advanced. In the Levant, Jordan and Palestine stand out. In North Africa, Morocco is ahead.
Hence, one may assume that these varying levels of capital market development translate into multiple strategies to be pursued by the region’s exchanges. But that is not the case. The current operating business model of exchanges worldwide means that each MENA stock market will have to choose one of two strategies: Node or Niche.
Node or Niche will be the only choices for many exchanges in frontier and emerging markets, including those in MENA. As worldwide liquidity continues to gravitate towards fewer global streams, an exchange operating in a developing country will have to choose. It can function as a liquidity node, aggregating liquidity within its region and connecting the resultant regional liquidity pool to international liquidity streams, benefiting listed companies, investors and intermediaries. Or, it can specialize in terms of services and product offerings – the niche approach.
The decision of individual MENA exchanges to go for either a Node or Niche strategy will be influenced by multiple factors. One of those factors is the presence of international exchanges in the region.
Three global exchanges are currently present in MENA in different ways. The London Stock Exchange has a strategic relationship with Morocco. Dubai owns a substantial minority position in Nasdaq Group. And several countries are using Euronext’s trading system, as well as Nasdaq’s. These relationships are bound to inform, with varying degrees of intensity, future strategies of MENA stock markets. A key question is whether ties to the big boys will connect the region’s liquidity pools to international liquidity streams – the liquidity node strategy.
The need for MENA companies to list on liquid exchanges is another factor influencing strategies of local exchanges. MENA companies are moving from being successful local operations to becoming regionally competitive enterprises with, at times substantial tranches of international activities as part of their portfolios. In doing so, they have gained added appreciation of the role that equity plays in their capital structures. Investors and shareholders are also realizing that for the Middle East to evolve into an internationally competitive region with successful industry clusters, companies in the region need to expand their equity bases. Raising seed and venture capital, seeking private equity injections for turnaround and growth, and going public and listing on liquid exchanges are becoming common practices in a region that has traditionally relied on debt.
Some exchanges in MENA may choose a Node Strategy, specializing in certain products and services. Nasdaq Dubai has established itself as the listing venue of choice for Islamic sukuks. Abu Dhabi has been actively seeking to lead the listing and trading of exchange traded funds (ETFs) in the region. Casablanca may function as a platform to access certain African capital markets. Given that Jordan has one of the largest reserves of phosphate in the world, the Amman Stock Exchange has a golden opportunity to launch an internationally traded phosphate contract in partnership with an international commodities or derivatives exchange.
As MENA exchanges come of age, they will look for new and better ways to serve stakeholders. Cross border investing is foreshadowing the creation of regional heroes in multiple sectors. The compression of dispersed regional economic interests into single corporate entities with regional and international mandates and aspirations is putting pressure on MENA exchanges to respond. Instead of a race to the bottom, MENA stock markets will soon start on a different kind of competition to gather regional liquidity, and listings. The international alliances and liquidity linkages that MENA exchanges will develop will provide another way in which the region is becoming inexorably linked to the rest of the world; something that is of immense benefit to companies, investors and intermediaries, and an exciting development that will usher in new opportunities and challenges.