Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES 495CompetitionA critical lesson confirmed in many jurisdictions is that competition in securities marketsis almost always beneficial and, therefore, barriers to competition may obstructthe development of capital markets. However, the possibility of achieving the full benefitsof competition rests on the assumption that there is a market with sufficienteconomies of scale to permit competition. Thus, for smaller, less developed capitalmarkets, where trade is inconsequential and markets are highly illiquid, the expectationof competition by trading entities, particularly at the national level, is highly optimisticat best. For these smaller markets, competition should be viewed in relation toother national markets; it is the capacity for a national exchange to compete withother benchmark markets in the same region.One practical example, albeit for a small emerging economy, highlights themerits of competition in the context of trading systems.This particular situation arosein a country with a stock exchange that had for a long time been dominated by asmall number of well-established brokers that essentially ran the exchange as a monopolisticclub.They ran the exchange inefficiently, restricted access to its trading system,and were not interested in innovation. In response to this situation, one of theinternational financial institutions supported the establishment of a new, competingexchange.After much political wrangling and an extended start-up process, the newexchange was finally created. In response to its creation, however the old incumbentexchange dramatically changed its practices, embracing new technology and seekingto focus on its customers rather than its owners. So successful was the old exchangein doing this that it eventually forced the new exchange out of business. The internationalfinancial institution, which had supported the new exchange, was thereforein a paradoxical situation. On the one hand,'its investment in the new exchange wasa financial failure; on the other hand, its support for the new exchange proved to bean agent of positive development for the country's capital markets.Competition between trading systems can also occur internationally. In theLatin American context, the Bolsa de Madrid established Latibex to provide internationalinvestors a vehicle for investing in Latin American blue chip stocks via a singletrading and settlement system, with a single currency (the euro) and with internationallyrecognized standards of transparency and security.The aim was to help investorsinvest in Latin America, without their having to deal with a multiplicity of differentlegal environments, exchange rate and fiscal regimes, and trading and settlementsystems.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub