Much has been written about the dire outlook for Latin America’s equity markets, as stock exchanges in the US and Europe siphon off liquidity and international companies delist their local subsidiaries. There is much hand-wringing about what the proper response to this should be. The argument is that shrinking local equity markets make it even less likely that companies will list. Only the largest firms will be able to raise equity capital in international markets. Small companies, unable to access the vast US equity markets, will be swept aside and eventually die for lack of capital. Something must be done to save the markets.
While it is clear that many national equity markets are fighting for their lives, this does not mean they should be saved. Financial markets are in state of constant evolution. It is pointless to reconstruct an illusionary past of bustling equity markets. On the contrary, the subversion of traditional financial markets around the world by new electronic and web-based platforms should be seen as a positive step for Latin America.
The ease of electronic trading and the elimination of capital and currency controls in most countries in Latin America is making it just as quick, and often cheaper, for investors to trade stocks listed in New York, on the Nasdaq or European bourses as it is for them to trade locally. The rise of pan-regional companies listed in the US is another feature of these new capital markets. There are now at least four Latin Internet companies listed in the US or Madrid and the forthcoming initial public offering of Yupi, the Miami-based portal, will add a fifth. And there are plenty of old economy companies are listed on the New York Stock Exchange in ADR form.
Little has been said about how companies, large and small, can also benefit from the decline of traditional local markets and the rise of new electronic and Internet-based markets. Argentina and the World Bank both claim to have successfully sold bonds on the Internet. The extent to which they used the Internet to actually access and sell to new investors is debatable since many buyers were contacted by telephone and asked to book their orders on the Web. However, these deals do seem to mark the beginning of a new trend in finance. Banks, especially in Brazil, have begun offering a range of services online. They are acting to protect their futures in a new world that threatens their legacy systems and big investments in staff and physical networks.
There are several new financial websites focusing on Latin America. At the moment they are mainly passive, allowing investors to buy and sell securities, providing them with research material and helping to manage their portfolios. But it is not hard to imagine the day when these sites will take the next decisive step, to become distribution networks, offering and recommending new issues over the Internet to retail and institutional investors. Access to capital markets – by issuers and investors alike – could one day become far more democratic than today.
But there are some serious issues we should begin thinking about now. Investor rights are an immediate concern. Minority shareholders have always had a hard time in Latin America. They could become vulnerable to exploitation by unscrupulous dealers and issuers approaching them on the Internet. Yet, who will regulate web-based financial services and how are regulations to be enforced? Many of the financial websites are managed from the US but target clients are throughout Latin America.
US regulators may be tough, but protecting investors in Latin America is unlikely ever to be a major concern for them. And should they decide to crack down, what is there to stop companies from relocating to virtual jurisdictions, where tax, disclosure and legal standards are reduced to a bare minimum, much as some shipping companies seek flags of convenience or some banks go offshore?
And will the rise of Internet-based underwriting, trading and marketing lead to the creation of a single, amorphous financial marketplace one day spanning the world managed by massive programs? Or will markets continue splintering to the point where a multiplicity of web-based systems each owned and run by rival companies?
We probably still have some way to go before these issues become a burning priority. Yet if there is one thing we have learned from the Internet revolution, it is that progress is accelerating at a bewildering speed. What seemed far-fetched or even impossible yesterday is today’s mundane reality.