Latin America at Inflection Point in Electronic Trading

Terry Flanagan

Electronic trading is making a steep ascent in Latin America with Brazil, Mexico and the Andean region all hubs of activity.

Brazil, for one, is at a critical juncture as regulators weigh up whether to require the incumbent exchange, BM&FBovespa, to provide overseas competitors with access to its post-trade clearing services.

The Comissão de Valores Mobiliários (CVM), the securities market regulatory body in Brazil, last month published a study by European consulting firm Oxera on the costs and benefits of changing the competitive structure of the market for trading and post-trading services in Brazil.

The Oxera study concluded that BM&FBovespa would be likely to continue as the monopoly provider of services in Brazil, because entry by either a trading platform on its own or a trading platform with a linked central counterparty would be difficult, if not impossible, without the co-operation of Companhia Brasileira de Liquidação e Custódia, the Brazilian clearing house owned by BM&FBovespa.

“The presidency of CVM is changing in the next few weeks, so a recommendation on whether BM&FBovespa should open its clearing services to international competitors is unlikely to be made before then,” said Alice Botis, head of Latin America business development at Fidessa, a trading technology firm.

Exchange operators Bats Global Markets and Direct Edge have both announced their intentions to set up alternative trading venues in Brazil.

“Although dark trading, crossing networks and internalization are not allowed by CVM, there is little question that fragmentation will come to Brazil, the question is when,” said Botis.

Whether new venues create their own clearing operations or clear through BM&FBovespa, fragmentation will have an impact on the way allocations are managed and consequently on middle office capabilities.

“As with front office capabilities, brokers need to be prepared to implement new technology to facilitate allocations for executions across multiple venues,” Botis said.

For international firms coming to Brazil, the transition has not always been a smooth one, and many have found the necessary “tropicalization” of their existing systems and processes more difficult than anticipated.

“Brazil is not for beginners,” said Botis. “It’s very clear that you can’t just take a U.S. or U.K. trading system and drop it in Brazil. It needs to accommodate Brazil-specific market structure and regulations, enabling both domestic and international clients to trade efficiently while remaining compliant with local requirements.”

Trading connectivity firm Perseus Telecom and partner GlobeNet have built a fast trading connection to BM&FBovespa from New York’s Nasdaq exchange, which Perseus also routes to major global exchanges such as the CME, NYSE, Bats, London Stock Exchange, Deutsche Börse and Eurex.

“Trading firms looking to leverage liquidity, arbitrage and hedging opportunities are able to connect simply to Brazil whilst solving the industry conundrum of multiple hop delays and capitalizing on time sensitive geared algorithms,” said Dr Jock Percy, chief executive of Perseus Telecom.

Mexico is also experiencing a rapid change on its stock exchange, most notably the upgrade to Mexican stock exchange operator Bolsa Mexicana de Valores’ (BMV) Monet matching engine, which is being developed in-house and is to go live in early September.

“The upgrade will increase the need for brokers to upgrade their own processing capabilities in order to accommodate the expected increase in trading volumes from domestic and international investors,” said Botis.

The aim is for Monet to deliver 100 microsecond message latency and improvement of more than 25 milliseconds over the current equities platforms, and to increase the number of messages capable of being supported to 200,000 per second.

In the Andean region, the initiative of Mercado Integrado Latinoamerciana (MILA), which operates exchanges in Santiago, Bogotá and Lima, will increase liquidity of locally-listed companies by providing local brokers and investors easier access to these markets, as well as attracting foreign investors to the Andean region.

The Peruvian BVL exchange has received regulatory approval for electronic direct market access, and Colombia, which currently uses FIXML 5.0, is considering whether to make the MILA FIX 4.4 gateway available to vendors and brokers, said Botis.

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