Latin American Capital Markets

38 REENA AGGARWALBox 2-1Resource channelCapital formation| The Role of Capital MarketsEfficient allocation of capitalEconomic developmentInvestment opportunities for citizens and institutionsSeveral Latin American securities markets have made major strides in thepast decade.This is clear from the increased access of large Latin American blue chipcompanies and governments to global financial markets.This access reduces the costof capital for these companies and makes them more competitive at the global level.Ultimately, this means economic growth in the country and the region. However, successhas also led to some problems for local markets.When capital raising and trading move out of the country, local exchangessuffer in the form of lower capitalization, lower volume, and lack of liquidity. In additionto dealing with the issue of large blue chip companies, there should be a strategyto help small and medium-size companies raise capital.These companies are theengines of future growth. The region has made important advances in the pastdecade; however; a lot more needs to be done in terms of formulating a strategy tointegrate into the global financial marketplace, address technological issues, continueto develop the appropriate legal and regulatory infrastructure, and strengthen the developmentof financial intermediaries.The global economy and the availability of the Internet are reducing the roleof financial intermediation. Exchanges could lose their traditional sources of revenueand must develop strategies to add value or face the consequence of becoming obsolete.For example, listing fees will not be a major source of revenue in the future;instead, the competitive position of the exchange will depend on the trading volumethat it attracts. The role of stock market intermediaries, such as market makers andspecialists, will be reduced in certain cases. Markets will not revolve around intermediariesor exchanges; the most important determinant of success will be who attractstrading activity.This chapter raises the politically sensitive question of whether every country,especially every smaller country, needs its own exchange. If so, then at the minimum,countries should consider the possibility of sharing services between exchangesin the region to reduce costs and make the exchanges efficient 1Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub1Part of this work draws on Aggarwal (2001).