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Russian funds made a hoopla out of the leading RTS index giving the Chinese stock market a drubbing over the last decade, returning five times as much, or a bit more than 750%. But they go quiet when you mention Mongolia, the best performing market in the world over the last decade, up a bit more than 1,600% over the same period.

Russians needn't be too abashed, as the two exchanges barely warrant comparison: Moscow sees a daily turnover of some $2bn-3bn a day and half the investors are foreign, whereas the Mongolian Stock Exchange (MSE) has a daily turnover on a good day of just $100,000 and there are almost no foreign investors to speak of. Indeed, a businessman with a gold Visa card and a penchant for a flutter on a mining stock could move the MSE index by several points on his own.

The MSE is tiny. The entire market capitalisation is a mere $500m. There is no global custodians in the country, making it all but impossible for foreign investors to buy shares, even if they wanted to. And the trading is subject to manipulation and razor-thin free floats.

Reform of the market has yet to start and its existence remains the legacy of the privatisation process in the 1990s. Many of the companies currently listed are the end result of the voucher privatisation programme, where the Mongol and Russian experiences are very similar with managers walking off with their companies. Moreover, some of these companies are now defunct (but remain listed), while others that are operating don't bother to meet the financial reporting requirements because no one has got round to enforcing the rules.

Clean-up

The upshot is the stock market is volatile and doesn't really play much of a role in the country's economy. But that has not stopped it performing. Over the first eight months of this year, the leading TOP20 index rose from 6144 to 10942, putting it firmly on track to be the best performing market in the world yet again, while the market capitalisation increased by over 80% in the same period.

And the index and volumes are likely go higher now the government is making serious noise about finally cleaning up the exchange. In one of his first speeches, Prime Minister Sukhbaataryn Batbold highlighted the need to develop an equity market and the government is keen to encourage domestic listing, according to Roland Nash, head of research at Renaissance Capital.

And change will come sooner, rather than later. The MSE is currently considering bids by the London Stock Exchange, Sweden's OMX HEX and South Korea's main exchange to provide management services for the national exchange and supply it with new trading technology. A decision on the winner is expected before the end of the year. "We are offering them technology as well as business development," says Jon Edwards, who spearheads the LSE's business in Eastern Europe. "The market is small and the listings needs to be cleaned up, but the potential is phenomenal. Mongolia could do better than Kazakhstan if they can put all the pieces in place."

Edwards says the MSE is right at the very beginning of the process, but if it follows the experience of other countries in the region that have attempted equity market reforms, the size of the market should go up by an order of magnitude.