Hitting Their Stride: Mexican Markets Mature
Hector Casavantes of Finamex assesses improvements in the Mexican markets, like technology upgrades, high frequency trading and regional partnerships, as well as the work yet to be done.
How has Bolsa Mexicana de Valores’ (BMV’s) exchange upgrade improved trading conditions in Mexico?
The technology update by the BMV placed us on a path toward a more standardized market, and it definitely helped to raise international investors’ awareness of the existing modern, transparent and easy to trade market. While the benefits of the upgrade are clearly apparent, there have also been collateral effects. For example, after the upgrade, new and more demanding players have moved into the picture, increasing the level of demand for system reliability, pricing models and additional features common on other markets, such as liquidity rebates.
There is still work to do, however, as the exchange platform, upgraded though it is, reserves certain access privileges for more established domestic participants. For example, purely electronic foreign brokers cannot obtain or see the Market on Close (MOC) book, the hidden midpoint peg bookmarks for IOIs, the regular full-depth order book, etc. The exchange needs to work on leveling access, and they have recently demonstrated that they are both aware of this issue and examining how to address it.
What advantages in terms of liquidity will the Mercado Integrado Latino Americano (MILA) bring to Mexican markets?
MILA is thought to provide access to new natural liquidity sources in both directions. From what we can see, Mexico may initially provide new asset classes besides equities, including global stocks, ETF’s and eventually derivatives for South American MILA countries. The domestic buy-side investor from any of those countries, like pension funds, insurance companies and corporate treasuries, may find Mexican-listed names appealing within their risk strategy objectives. For Mexican institutional investors, MILA may provide investment options independent of fluctuation from the local macroeconomic, sector-related or seasonal forces.
For all the countries involved, MILA will provide a good opportunity for sharing technology, best practices and maybe adding productive competition, thereby encouraging increasingly costeffective services. On the downside, there are a number of legal and regulatory issues that need to be resolved before the promise of the MILA integration is a reality. In the medium term, the expectations for MILA’s role in Mexico are quite high.
What is the role of High Frequency Trading (HFT) in Mexican markets?
In Mexico, HFT is found to be mostly focused on statistical and spread arbitrage strategies and includes other market making strategies to a lesser extent. These HFT strategies have contributed both liquidity and efficiency to the overall market structure, as well as facilitating the sharing of experiences and best practice about HFT strategies and technology.
The drawback of HFT in Mexico is that the majority of those strategies are executed within a small subset of symbols. Typically, these are Mexican symbols with ADRs or global ETF’s, which pushes the rest of the market mainly the mid to low liquidity stocks, under the radar. In time, I am confident that the mix of conventional investors and HFT firms will only increase the overall ‘cake size’ for all participants.
How have market data speeds from BMV and the Mexican Derivatives Exchange (MexDer) kept up with trading speeds?
The Mexican exchanges have invested heavily to increase their overall processing and messaging capacities. The efforts are noticeable, and that is the reason why some brokers now offer services for HFT clients and deploy proprietary HFT strategies. The average speeds, however, are still below what is expected by and necessary for many participants.
For example, a simple marketmaking automated strategy on fungible cross listed stocks, say QQQ or AAPL, cannot, by any means, reflect the originating market price fluctuations. We need to systematically incorporate semi-static pricing models and low-pass filters to cushion the real motions of the source Best Bid and Offer (BBO), plus the foreign exchange effects, which translate into lost opportunities or reduced margins. In addition, the prospect of cancellation fees discourages quantitative traders and strategists from exploring more sophisticated HFT strategies. The exchange operators have confirmed their commitment to address these issues soon, and we expect that will result in significant improvements.
As international brokers increase their presence in Mexico, how are Mexican brokers differentiating themselves?
Local knowledge of market rules and the economy as well as an understanding of domestic social contexts can provide a sort of differentiation. The core differentiating factor for almost every broker, however, remains the price, independence and other added values like research, trading ideas and prime brokerage. All of these services are becoming commoditized, and the success of international brokers has only helped accelerate this commoditization.
It is the duty of each local broker dealer to find a competitive niche, be it geographical, economical or technological, and follow a well-designed marketing, sales and operational strategy to provide genuine value to their clients.
To learn more about how MILA is using FIX, please visit http://www.fixprotocol.org or http://bit.ly/zJdrMo.