Emerging Markets Trading - Questions

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Rank: Senior Chimp | 28

Hello Guys,

One q: Can somebody please explain what EM traders do? I know there will be some ppl who would point me in direction of another thread or would bash my question, but all I am trying to do is to learn. All I want is the description/ example of what they trade (e.g. product or range of products); are those products liquid; how many countries / products one trader can handle; can you trade derivatives at em ( I really don't know, so excuse me for this q) or any other insights would very helpful.

Thanks everybody.

Comments (37)

Apr 30, 2010

bump. someone should help this fella. would if i could. what kind of place are you talking about btw, OP?

i would also appreciate hearing from someone on an emerging markets desk...

Apr 30, 2010

Sat on an EM desk this past summer. At this BB, EM traders trade rates, bonds and their derivatives, and currencies and their derivatives of EM countries - basically everything except commodities and equities. In NY, the focus is on LatAm, mostly Mexico and Brazil with a little bit of the other Latin American countries sprinkled in. Russia, Eastern Europe, South Africa, and the Middle East are handled by European desks, while EM Asia (India, China, etc) is handled by Asia desks. Traders typically traded only one of the three products, and might even focus specifically on one particular country. Yes, you can trade derivatives - lots of sovereign CDS traded, as well as currency options.

Best Response
Apr 30, 2010

I'm a macro trader/strat, but started my career trading EM. Firstly, you clearly need to do some research on your own. If you're starting on an EM desk, you can learn a lot before showing up just by using google.

Anyway, emerging markets traders can cover many products and focus on 1-4 countries in which they make markets, or they can trade 1-2 products and cover many countries.

Let's say you're an EM currency trader. You will probably be split into 6 or more desks: Asian deliverables (HKD, SGD, THB), Asian non-deliverables (CNY, TWD, KRW, INR, IDR, MYR, PHP, VND), Eastern Europe (PLN, CZK, HUF, RON), MENA (SAR, OMR, AED, JOD, MAD, TND), Exotics (KES, BWP, NGN, LKR, PKR, etcetera), and LATAM (BRL, COP, PEN, MXN, etc.). Turkey, South Africa, Isreal, and Russia (and places like Ukraine & Belarus) might get lumped into one of the above groups, or may be traded by a specialist who focuses on 1 or 2 of those countries.

In the vast majority of EM countries, there are capital controls of some sort. In places like Asia and Latin America, it's very hard to put your hands on local currency, so you can't trade spot, forwards, swaps, cross currency swaps, or any other instrument that requires physical delivery of cash unless you are an 'onshore' legal entity. If you are an 'offshore' legal entity, you must trade non-deliverable forwards (NDF) and non-deliverable swaps (NDS). This is true of all of Asia except HKD, SGD, THB, and RUB. The first three trade as G10 currencies do. The RUB is a convertible currency, so you can trade both deliverable and non-deliverable forwards and swaps. All of LatAm trades as NDFs except MXN, which is a 'normal' currency.

In most countries that trade as NDFs, there exists an onshore forwards market that can diverge significantly from the offshore NDF curve. The main reason for this is simple: non-deliverable forwards are contracts for difference that net-settle in USD (or some other major currency like EUR or GBP). As such, they represent the market's perception of the spot price in the future. On the other hand, deliverable forwards and swaps are calculated as the net present value of the interest rate differential between the two currencies in question discounted back to today. The divergence between the offshore and onshore curves is called 'basis' (there are many forms of basis risk, so don't think this is the only type), much in the same way that G10 currency futures can diverge from G10 outright forwards.

In countries with deliverable currencies and fiscal deficits, you can sometimes trade external debt. In the EM space, governments are reluctant to issue loads of debt to foreigners. If, say, Turkey wants to issue debt (they do), then most of it will be offered onshore, and only a portion will be offered to outside investors. Any time there is a government debt issuance, there will be people (the government itself, for instance) who will want to swap their fixed income stream (the coupons) for a floating one (Tribor + xx bps for Turkey), so there will be an interest rate swaps market (both a traditional uni-currency fixed-for-floating swap and a cross-currency swap market).

Further, through purchasing any form of government debt you expose yourself to the risk of a sovereign default (which is considerably higher in most EM countries than in most developed ones), there is a market for purchasing protection against the risk of default. Thus, the credit default swap market exists for sovereigns in the EM space (as well as within the developed market).

There are a limited number of currency and interest rate futures traded within the EM space, but the loan and depo markets exist for all of the deliverable currencies. Given the lack of IR futures for most of the EM space, currency forwards/swaps are used to determine the short rate curve, and the implied yield on the currency swap should be roughly equal to the rate charged for a loan or depo (you can, of course, widen your prices for any reason you like).

Moreover, you can trade options on most of the products I described above. USD/KRW (Korean won) options, for instance, use the USD/KRW NDF rate as the strike instead of the forward rate as would happen in deliverable currencies. As a result, rho is a bit larger (all other things being equal) for EM non-deliverable currency options than for EM deliverable currency options, because you can't directly hedge your interest rate risk. Additionally, swaptions within the EM space aren't uncommon, though the market isn't huge. The two largest EM swaptions markets are probably TRY and ZAR.

Finally, some EM traders also trade equities. Depending on the bank, EM equities may be housed under either equities or EM. I think the latter makes more sense, since there are a lot of rules involved in investing in emerging markets, and generalist equity salesmen are unlikely to know all of said rules without being deeply involved in the space.

I am not even going to talk about liquidity on a product-by-product basis. I have given you WAY more material than I knew when I joined the desk, so I am expecting a BJ later.

You're welcome.

    • 52
Apr 30, 2010

That much info deserves two silver bananas.

Feb 18, 2016

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Apr 30, 2010

Brotherbear, Sandy_Riprock

Thanks ALOT. I really appreciate it. Special thanks of course goes to Brother Bear. I will need to digest that info and probably ask some more qs that some users of this forum will bash. Anyway thanks a lot. I would give you as many points as I could but I have no clue how to give 'em here.

And final thanks.

Apr 30, 2010

well done brotherbear.

but wow so much of that went above my head. i'll have to re-read several times and ask people questions...

ps i think you Should talk about liquidity on a product by product basis.

Apr 30, 2010

yeah, I would agree w/ islandoffmorocco about liquidity.

brotherbear, If you have some time when you are not busy, lecture us on liquidity on a product by product basis, please.

Thanks a lot in advance

Apr 24, 2013


Apr 30, 2010


Hey man,

Can you share some of your experiences, please?


Jan 6, 2011


Hey man,

Can you share some of your experiences, please?


Brown Bateman, from the UK? Isn't he supposed to be DEAD?

I win here, I win there...

May 1, 2010

Not sure how useful my experience would be. As I mentioned above, I spent last summer interning in a BB FICC division of one of the 'exotic' countries listed by brotherbear above ((KES, BWP, NGN, LKR, PKR, etc. The branch focused on trading that countries denominated currency, government bonds, and money market securities. Spot FX transaction sizes were a lot smaller than the size traders dealing in bigger currencies would trade in London/NY etc. Also, while there may have been offshore trading of NDFs and other derivatives by offshore entities, traders in various banks onshore mainly dealed in the spot/cash markets.

The yield curve was only liquid up to 6 months. While short, this curve was still quite steep with rates ranging from 100bps overnight to 900bps 6 months out. To put this into perspetive, USD 6m LIBOR was around 45bps.

Spot FX was about 60% client, 40% prop, while cash goverment bond trades were around 90% prop, 10% client. The local corporate bond market was yet to take off but this may change soon as there were some local companies who began to tap into the bond markets with one raising about $250mm IIRC. Due to capital controls, the spot fx clients were all onshore entities such as oil companies loking to trade the local currency for usd and vice versa, and big multi-national companies. Traders had to deal with a lot of constantly changing government rules on securities trading to quench the volatility in the markets at the time. An example was a rule stating the maximum currency exposure a bank could have was limited to x% of shareholders funds, with the number x changing at different points over the summer I was there.

The bank did not trade any derivatives while I was there.

As for my experience in a London BB EM trading desk, it was just a few days shadowing experience not really worth commenting on.

May 1, 2010

Excellent posts above. I also did a stint on an EM trading desk and just wanted to point out that some traders also focus on credit (particularly credit default swap indices, sovereign CDS and local CDS) as well as a few commodities such as copper and oil.

May 1, 2010

Thanks a lot guys.

Gimli, can you talk more about your experiences, please. Especially about credit.


May 2, 2010

A Emerging market trader could possibly trade multiple products in a 1-4 countries?

May 3, 2010


Yes, an EM trader could be (and most of the time is) a multi-product trader. If you trade interest rate swaps in, say, Turkey, you're probably going to trade government bonds/external debt, currency swaps/forwars, and probably spot FX as well. In addition to trading local rates (TRY interest rate swaps), you will probably make markets in cross-currency USD/TRY, EUR/TRY, and TRY/ZAR swaps.

If your firm doesn't follow this model, then you will probably focus on one product, but trade it across several countries. If you trade, say, Asian non-deliverable forwards, the head trader will probably trade CNY, TWD, KRW, and INR, whilst the junior will trade IDR, MYR, PHP, and VND (since those books are worth less than the first four I mentioned).

As it concerns liquidity, let's start in Asia, and move west:

In all Asian NDFs, the liquidity period is the 1-month NDF. In CNY, you can usually get quotes through the brokers out to 2 years, but the vast majority of speculative trades are done in the 1-month bucket. I have seen CNY forwards trade out to 6 years. Anything beyond 2 years out, you need to start trading the NDFs like deliverable forwards, because the risk is that China liberalises its currency regime, and the currency becomes increasingly convertible over time. Out to 1 month, you can probably do $100 Mio of USD/CNY NDFs without moving the market much so long as Asia is trading. Once Asia goes home (around lunchtime in London), liquidity dries up a bit, and you can probably do about $50 Mio until London goes home. To be honest, NY doesn't have much of a presence when it comes to trading Asian EM markets, so the pricing is wider during New York hours, and the liquidity is worse than in London.

In TWD, KRW and INR, you can get prices out to 2 years (most of the time) through the brokers, and always if you are looking for a price less than 1-year out on the curve. A lot of the time, in these currencies, people trade the 12 month outright forward, and if they like the longer end of the NDF curve, will trade the 12 month - 18 month or 12 month - 24 month forward-forward. Each of these three has become much more liquid as the credit cruch has abated, and whilst it used to be tough to do $50 mio in the 1-month NDF, you can probably do $75 Mio out to 1-year without abusing the market much.

In PHP, VND, IDR, and MYR, the markets are significantly less liquid than the 4 major Asian non-deliverables. Of these 4, VND is the least liquid, followed by PHP, followed by IDR, followed by MYR. In Vietnam, you can get prices out to 6 months (maybe), and can probably do up to $5 Mio, but the prices aren't going to be great. PHP is basically the same as VND, but fixes 1 day before maturity instead of 2, and trades (sporadically) out to 1 year. I wouldn't be too comfortable quoting anything beyond 3 months in either VND or PHP, but I would if I had to. IDR and MYR have nice volatility, and are at least reasonably liquid in the 1-month tenor. I have never seen a price in any of these 4 currencies beyond the 1 year tenor.

Before moving on, it is worth noting that whilst there can be a great deal of basis between onshore and offshore forwards in all of the Asian NDFs, it is nearly non-existant in KRW, as it is fully arbitrageable by the Bank of Korea (who is legally allowed to deal in both the onshore and offshore markets), so the NDFs in Korea trade exactly like deliverable forwards.

Now, you can do options on NDFs, and you can do non-deliverable swaps (basically two NDFs on the opposite side of the price) on each of the 8 currencies listed above. Just as in the outright forwards, corporates have the most interest in CNY, followed by KRW, INR, and TWD (probably in that order). The implied vol and vol-of-vol has come off a lot in the last year. I want to say that implied vol on the 1-month USD/KRW riskies was at 9 (ish) today, whereas the same pair was trading above 20 a year ago (I think around 24). Because the most liquid period for the NDFs is the one-month, that also happens to be the most liquid tenor for the options market. There is quite a lot of risk in EM options pricing because the diffusion process isn't continuously differentiable. In the EM space, the risk is always that the EM currency devalues, and there is considerable jump risk surrounding events. As such, Black-Scholes doesn't work as well, and volga-vanna models are inadequate. The farther down the NDF curve you travel, the wider the bid-ask is going to be, and the riskies are generally going to favour a depreciation of the EM currency.

In deliverable Asia, you can do nearly unlimited size in HKD without moving the market much. HKD will trade out to 5 years without much difficulty. You can do cross-currency swaps (generally generated from origination teams in DCM), regular currency swaps, forwards, forwards of forwards, loans and depos, spot, and options. The HKMA keeps a currency board that regulates price movements. USD/HKD can only move between 7.7500 and 7.8500, and the volatility is nearly non-existant at the moment (not necessarily true all the time). In spot, you can probably do a yard ($1 BIO) without moving the market more than 20 or 30 pips. I mean, you could just try to destroy the market, but that's not 'best execution,' and you're not going to keep your clients happy in doing so.

In SGD, the MAS runs a quasi-peg to a basket of currencies. Each bank has its own NEER or REER to predict USD/SGD manipulation given movements in EUR/USD, GBP/USD, USD/JPY, and a few other currencies. You can probably do $50 Mio in the spot market and get a price 20 pips wide. In the short-dated loan/depo and swaps markets, you are going to have a hard time finding liquidity after Asia goes home, so you may have to pay above the implied yield to cover your positions (if you're short SGD in New York, for instance).

THB is clearly the least liquid of the Asian deliverables, and I am fairly sure than you can't keep balances of more than 300 Mio THB on your books at any one time (if you are an offshore entity). I don't know that much about THB because I don't normally trade it, and they have a coup every few years, so I don't think it trades too far out on the curve.

I don't feel like typing much more. If I feel up to it, I might spend some time talking about EMEA and LATAM later.

    • 8
May 3, 2010

^ thank you

May 4, 2010


Man, just two words: thank you. I really mean it. I really appreciate it. If you feel like writing later, I would really like to hear more about LATAM and EMEA. And especially Russia. The country has so much potential.


Jan 6, 2011

Brotherbear, I was wondering if you may have a chance to write a little bit about LatAm? Very curious. Thanks again for all the info you've already posted.

Jan 6, 2011

this thread should be put on the front page

Jan 6, 2011

Really great isn't it?

Apr 4, 2011

Do the NY/London desks also trade Asian deliverables and non-deliverables or are they all done in HK/Singapore?


Apr 6, 2011

Do the NY/London desks also trade Asian deliverables and non-deliverables or are they all done in HK/Singapore?


Read the post. No liquidity when Asia closes so only London.

Aug 8, 2014

Thanks to the contributors, awesome topic.

May 19, 2016

I noticed that brotherbear isn't too active these days but damn this was a great thread. If anyone trading any EM products (FX, credit, swaps) can add to this, I would really appreciate it.

May 20, 2016

nice topic, there are nice discussion about market trading. it will be helpful for everyone, thanks

May 20, 2016


May 20, 2016

You can try Riding the Bull by Paul Stiles on Emerging Market Bond Trading in mid nineties with Merrill Lynch. It's more of him complaining about what a hard time he had working there, rather than detailed finance. And what happened in Mexico in 1995 is probably outdated by now anyway. But anything is something.

May 20, 2016

Most of the BB in the NYC have an EM trading desk however, they are going to be much smaller compared to its counterparts. This will be consistent throughout banks worldwide (a generalization) due to the risk that is associated with EMs. If you want to stay in the US look at the larger mutual funds, such as Templeton, as well, they are heavily invested in EMs. In terms of cities with a high EM desk density, I would say London takes the cake on this. There are several groups that invest across the EM board, for example NY-LatAm, Singapore-Asia, and London-Worldwide.

If you have a foreign language under your belt consider it an advantage when applying for jobs.Believe it or not, a good portion of country & company financial data is only published in the local language (referring to countries outside BRIC). For instance, currently, I am working at broker house in a EM country, and most of the bond information I collect on a daily basis is only published on the government website, which is in the local language. If you're tracking Chinese equities, yes, you can go on Bloomberg and find what you need; however, if you are tracking Vietnamese bonds most likely that information will not be readily viable through the normal means.

here's a nice post, if you already haven't seen it: //www.wallstreetoasis.com/forums/emerging-markets-tr...,

May 20, 2016

Not really unconventional, why don't you shoot a message to one of the sales/traders on the desk. Yea you might come across as a noob, but then again you are a noob. Just ask them if there are anyways that you could best prepare or if they have any primers they can share.

I mean shit, you will be an intern in a rather exotic market, they're prob not expecting you to know your shit and I think it shows initiative on your part. Man up.

May 20, 2016

SCB are good at all things EM

Jan 28, 2017