Constrained liquidity is a significant obstacle to the development of stock markets in frontier economies. Less-liquid exchanges face greater challenges in attracting both investors and new issuers, ultimately impacting trading volume due to the higher costs associated with limited liquidity. Implementing policies that enhance liquidity is therefore one of the most effective ways to deepen financial markets.
By introducing corporate factors that facilitate and reduce the costs of transactions, trading activity can be stimulated. This white paper will focus on four key corporate factors: corporate governance, ownership concentration, foreign investor participation, and direct trading costs—including securities trading taxes and exchange fees. It will first define the concept of liquidity and its measurement before providing an overview of liquidity conditions in WFE frontier markets. Given that frontier markets are particularly affected by liquidity constraints, this analysis will place special emphasis on them.
The study will examine two specific cases: the Muscat Stock Exchange and the Dhaka Stock Exchange. Additionally, WFE data will be analysed to assess liquidity patterns among WFE frontier market members over the past 25 years. In doing so, this white paper will complement previous research conducted by IOSCO and the WFE on liquidity in emerging markets.
