02.15.2012
By Terry Flanagan

Nuances of Entering LatAm

The booming Latin American markets present their own unique set of challenges for new entrants.

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

New exchanges entering Brazil, such as Direct Edge, may face some challenges given the complex nature of the Brazilian system. Incumbent BM&FBovespa, which owns the CLBC clearinghouse, is likely reluctant to open its infrastructure to competitors. The government will also have a substantial influence.

“You have so much government influence in Brazil,” said one New York electronic trader at a firm with a presence in Brazil. “However, we see them softening in the future. They are getting creative about the partners they let in. You need to have competition or it stymies growth.”

In addition, with the different regulatory framework in Latin America, it creates an additional set of challenges in terms of algorithmic and strategic planning.

“We can’t just take our U.S. or European model and drop into a different time zone. There are a lot of market nuances we need to understand. We need to take our expertise and move it into that region. “A lot of it is understanding a different market structure. Brazil has a different closing mechanism. It’s about how you interact with those nuances. You then tune your algorithms to adapt to that.”

The challenges are not unique to Brazil, as Australia has also recently seen the introduction of competition in the form of Chi-X Australia. It launched in late October and quickly reached over 2% market share within its first month. It has since fluctuated between the 1% and 2% range as it tries to break the near monopoly of the Australian Securities Exchange. It will look to do that through aggressive pricing and new initiatives. The ASX however continues to maintain a monopoly on clearing in Australia.

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