Improving trading costs and financial literacy are key to enhancing retail investor participation in emerging markets, according to a new report from the Paris-based World Federation of Exchanges (WFE).
The report, published on Thursday, examines how exchanges can increase retail investor participation in emerging markets considering factors such as transaction costs, tax rates and financial literacy programs.
The report finds that macroeconomic factors, such as interest rates and gross domestic product (GDP) growth rates, are important to retail participation. Specifically, it says that interest rates “have a strong negative influence” on both the breadth and depth of retail trading. In addition, GDP growth rates are positively correlated with retail trading activity.
At the exchange level, the report also finds that the cost of trading impacts retail participation. Specifically, it notes that changes in trading fees, or clearing fees, by themselves do not impact retail participation unless those changes are passed on and impact the retail investor’s costs to trade.
The report also finds that exchanges’ financial literacy efforts impact retail participation. It says that there’s “a positive relationship between financial literacy programs, such as trading games and training courses, and both breadth and depth of trading.”
The WFE report notes that financial literacy has a bigger effect in markets where retail trading is relatively lower, whereas trading costs have a bigger impact on markets with higher levels of retail activity.
“What is clear is that the breadth and depth of retail trading is impacted by various factors: macroeconomic indicators, in-country characteristics, cost, and financial education,” says Siobhan Cleary, head of research and public policy at the WFE, in a statement. “Exchanges wishing to enhance retail participation may be able to address these final two levers, but ongoing work with regional stakeholders to build a strong and resilient market that caters for different investors must also be a key aim.”
“Exchanges value the participation of retail investors in their markets and are engaged in a variety of initiatives to enhance this participation,” adds Nandini Sukumar, CEO of the WFE, in a statement. “They also clearly understand the importance of coupling such participation with appropriate financial literacy programs.”
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