Type to search

Uncategorized Archive

Latin American Electronic Trading: Caliente!

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 Brazilian buy-side is a broad mix of pension funds, hedge funds, retail and foreign with foreign investors holding a majority  of the value of the market.

Large pension funds/institutional investors hold 21% of the market’s value. Domestic hedge funds trade cash and derivatives using long only, long/short, and quantitative strategies and are quite sophisticated in measuring and managing risk due to a history of volatility in the market. Proprietary trading desks of investment banks and standalone proprietary trading firms are the ones using high frequency trading strategies. This segment has grown in the last two years and there is much interest from USA proprietary trading shops.

There is significant retail flow – 30% of equity trades mid 2009 came from a retail trade blotter provided by Bovespa and brokers called ‘HomeBroker.’

High Frequency Trading

High frequency trading grew quickly in 2009, but only BOVESPA, BM&F and Mexder (Mexican Derivatives Exchange) have enough liquidity for high frequency strategies. The historically high (but declining) market volatility helps strategies, however the lack of alternative marketplaces holds back strategies dependent on fragmented liquidity. 65% of trading volume on BOVESPA is DMA while 10% of trading volume is estimated to be algorithmic trading. On BM&F, 18% of trading volume is DMA with 4% being high frequency trading. In the last two years BOVESPA, BM&F and Mexder have all launched co-location services and low latency connectivity and investment banks have rushed to develop high frequency trading strategies, and to provide algorithms to buy-side clients. New broker equity algorithms are being launched each month from local and international brokers, with similar strategies to what is offered in Europe and the US.


The Mexico Stock Exchange is the second largest equity exchange in Latin America, but a distant second with only 1/10th the trading volume of Brazil. The market is stunted by large family holdings and restrictions on foreign participation. The Mexican Derivatives exchange is more developed than the equity exchange, and is fully electronic. The most traded contracts are short term interest rate futures and a new partnership with CME, beginning in 2011, is expected to increase trading volumes.

Chile, Argentina, Peru, Columbia

The Santiago Stock Exchange is an equity and fixed income with limited derivatives. It competes with the Santiago Electronic Stock Exchange and the most important investors are private pension funds, which are funded through a compulsory pension program similar to a USA 401K plan. Approximately 70% of trading of Chilean companies happens through American Depositary Receipts traded on American markets. The Argentinean Market is greatly held back by a volatile economy and foreign exchange restrictions. The equities market is small as corporations tend to raise money through debt. The three largest brokers in Argentina are Bank of America/Merrill Lynch, Allariaa and Raymond James and there are three exchanges including the Buenos Aires Stock Exchange. Columbia and Peru have very small trading volumes, but are hoping to grow. Columbia in particular has recently upgraded its technology and is aggressively trying to attract high frequency traders.
Brazilian bankers are migrating back to Sao Paulo to earn bigger bonuses as Brazil and to a lesser extent Mexico have trading volumes today that are impossible to ignore. Caliente! Should you be interested in the full report, please visit TABB Group.


You Might also Like