Brazilian bankers are migrating back from New York to Sao Paulo because the bonuses are better. Proprietary trading shops of local banks co-located at the exchanges are battling it out with traders who have just flown in from Chicago. Brokerage firms are rushing to deploy new algorithms to their buyside clients. Exchanges are playing “hard to get” with global exchanges eager to bolster their emerging market credentials. Local technology vendors with relationships are trying to keep out foreign vendors with advanced technology. And everyone’s trying to arbitrage local stocks against American Depository Receipts. Martin Koopman, a veteran of the securities trading industry, shares his thoughts on Latin America’s trading arena.
Latin America (LATAM), dominated by Brazil and Mexico, is growing faster than fortune seekers from the global exchanges, banks and vendors can fly south. The major stock markets are up 400% over the last decade, and the Brazilian derivatives market, BM&F, is now the sixth largest derivatives market in the world with growth of 67% in Q1 2010.
Earlier, Brazil and the rest of Latin America did not receive the same adulation as other emerging market ‘rock stars’, but this changed in 2009 as Brazil emerged early and unscathed from the worldwide financial crisis. Latin America’s time has now come! In the last two years, major exchanges have gone public, trading volumes have soared, brokers have rushed to deploy electronic trading services, early mover technology vendors have racked up impressive sales, and high frequency trading has begun.
Brazil dominates Latin American securities trading with BOVESPA being the largest equity exchange in Latin America. The fully electronic BOVESPA offers low latency market data and connectivity, co-location services, and a FIX Protocol interface. It was in 2007 that Bovespa IPO’ed and in 2008 it merged with the derivatives exchange BM&F, the sixth largest derivatives market in the world with strong volume and growth in interest rate and currency futures.
CME and BM&FBovespa have a cross-shareholding of 5% each and have strong order routing and technology co-operation. Todate, regulators have not allowed any competitors to Bovespa or BM&F and nor are any new exchanges expected to launch.
Local brokerage firms are dominant in Brazil with some being acquired by local banks and out of the 86 Brazilian brokers, 16 are dominant in trading. The largest equity brokers in Brazil are Itau, Brandesco/Agora Senior, BTG Pactual Bank, Citigroup-Intra, Credit Suisse and Socopa, while the largest derivative brokers are Link, Liquidex, CM Capital, Interflow and Arhke. Some local brokerage firms have been acquired by international banks such as Citigroup acquiring Intra in 2008, UBS buying Pactual Bank in 2006 and selling it back to management in 2009, and ICAP buying Arkhe DTVM brokerage in 2008.
The SEC’s proposed Consolidated Audit Trail System seeks to capture in real time details of all orders and trades on US equity markets. Instead of using a custom regulatory data protocol within this new system, Martin Koopman asks why don’t we just use FIX? After all, we are using FIX for nearly all of these orders and trades already.
The Financial Information eXchange (FIX) Protocol has been one of the biggest success stories within our industry in the last 15 years. FIX is used in equities, foreign exchange, fixed income, commodities, and derivative markets. FIX is used by the buyside, sell-side and exchanges. It is a global standard, being the dominant protocol in all major European and most Asian markets.
The advantages of using FIX for the Consolidated Audit Trail System are:
A. Lower Costs to the Industry
Buy-side, sell-side and exchanges already communicate and store messages using FIX. Costs to develop systems to store and communicate trading information to the SEC or Self-Regulatory Organizations (SROs) would be lower using FIX as the data already exists in a suitable format today.
B. Less Error and Easier Auditing
As records are currently kept using the FIX Protocol, if any other protocol is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data.
All FIX messages are generated in real time for trading. The SEC could more easily attain a real time reporting system by using FIX.
D. Ability to Coordinate Across Derivative Markets and Globally
Market events such as the May 6 flash crash require looking at not just historical equity data, but also data from equity derivative markets and international markets. As the FIX Protocol is dominant in other asset classes and derivative markets, including equity index futures, equity options and global markets, regulators can more easily gain a broader view.