03.21.2012
By Terry Flanagan

Investors Seek Uniformity In New Venues

Despite nuances unique to each individual market, investors trading in several different markets want to employ similar strategies across borders.

“Traders want the algorithms to have the same objective function and names to be the same,” said one New York-based electronic trader. “When they use an algorithm in Brazil they want to have the same expectations for what will happen when they push the button as they do in the U.S. and Europe. But they also expect the algorithm to be engineered for the local market structure. It needs to be embedded into the strategies. There is a very strong desire for consistency.”

There’s been a broad increase in the amount of interest in Brazil and Latin America over the past few years. As clients in the U.S. and Europe look to for further trading opportunities in Brazil, whether it’s equities or derivatives, they desire to use the same tools, including having direct market access and the same suite of algorithms.

“There’s been a lot of interest in allowing our customers to electronically access markets in Latin America,” said the trader. “The market has its own unique microstructure which needs to be taken into account as you build algorithms. We have a whole suite of algorithms available in Brazil that our clients can use, engineered to behave appropriately for the market structure there.”

Of particular interest as of late from overseas traders are not the big-name liquid stocks, but rather the less liquid smaller-cap offerings. Traders are beginning to trade in Latin America and other foreign markets exactly as they would trade their own domestic market, as they become more comfortable with the region.

Latin America remains one of the most attractive regions for many market participants looking for global expansion. However, local regulation and a heavy-handed government may continue to be the toughest hurdles for new competition.

New exchanges entering Brazil, such as Direct Edge and Bats Global Markets, may face some challenges given the complex nature of the Brazilian system. Incumbent BM&FBovespa, which owns the CLBC clearing house, is reluctant to open its infrastructure to competitors. The government also has a substantial influence.

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