Brazil Boom

Terry Flanagan

A strong economy leads to vibrant capital markets, which lead to more players wanting a piece of the action.

Poll any number of global electronic traders and chances are that Latin America, in particular Brazil, is among the top areas they are looking toward for growth. And with good reason, as developments over the past decade have catapulted Brazil to the top of the emerging markets and, in some respects, near par with developed capital markets in North America and Europe.

Buoyed by economic expansion, investors and traders have been in on the action for years, buying and selling stocks, bonds and derivatives via Brazilian exchange BM&F Bovespa. The robust order flow – combined with technological advancements — have caught the eye of overseas trading-venue operators such as Direct Edge and Bats Global Markets, which are seeking a foothold in Latin America’s most populous nation.

“The investment infrastructure has sufficiently high capacity and sufficiently low friction cost to support new activity,” said Jose Marques, global head of electronic equity trading at Deutsche Bank. “In the last few years we have seen increased connectivity and trading technology from both local and foreign brokers, technological improvements at the exchange and the relaxing of the IOF tax on equity investments.”

Direct Edge plans to launch an electronic equities exchange in Brazil by the end of 2012, while Bats has said it is working with Brazilian asset manager Claritas Investments to build an exchange there. For its part, BM&F Bovespa isn’t as bullish – in late March, chief executive Edemir Pinto told the Wall Street Journalthat it will be at least five years until Brazil’s capital markets can support two exchanges.

Brazil generates about 80% of all securities trading in Latin America, according to Best Brazil, a financial-industry trade group. As of year-end 2011, foreign trades comprised almost 40% of Brazilian volume.

“The size and growth opportunities in Brazil make it very attractive for foreign investors,” Anthony Barchetto, head of strategy at Direct Edge, told Markets Media.

The launch of another exchange in Brazil would bring about the nation’s first trading-venue competition in a decade. On balance, competition stands to benefit market participants by encouraging innovation and pressuring prices downward.

“Any type of competition within the exchange space is good for the trading community,” said Emir Al-Rawi, managing director at IMC Financial Markets. “Our belief is that, should Direct Edge succeed in its plans, we would immediately see price compression in terms of the fees that exchanges will charge. Assuming that that is the case, we would also see more interest from the trading community to make a push into trading the Brazilian market.”


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