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The Brazilian Electronic Landscape

By Carlos Barros
At a time when the world is facing the prospect of severe change in its power relationships and the financial industry is under worldwide scrutiny, there are few places that inspire more confidence for long-term investments than the BRICs with Brazil probably presenting the most balanced profile of growth, democracy, economic stability and diversification. Carlos Barros of Agora CTVM explains.
After many years of doing their homework across the political and macro-economic spectrum, Brazil finally emerged from the recent turmoil as an interesting harbor for the highly demanding and sophisticated international investor, and is now set to become the access point for all Latin American markets.
Technological Evolution
The Brazilian market place is rapidly evolving and following many international best practices under a regulated environment, which definitely allows innovation but also aims to protect both the market and its participants’ integrity. Practices like ‘sponsored access’ and ‘co-location’ are already being used, while concepts like best execution is being discussed by the local regulators.
The basis of this development was created by the markets’ electronification. Bovespa, the equities market, ended its pit activities in 2005 and BM&F, the futures market, followed suit in 2009, almost a year after the two exchanges merged to form BM&FBovespa, the world’s 3rd largest exchange by market value.
To meet this challenge and be more cutting-edge, not only have the exchanges and the sell-side started to arm themselves with high-end technology, but the buy-side community is increasingly interested in high frequency algorithms, low latency EMS/OMS, Straight Through Processing (STP), risk systems, and all sorts of technology solutions that might impact their trading activity in this new environment.
Once the race started, the great majority of brokers, both local and foreign, began to look for some kind of electronic capabilities in the Brazilian market, creating an incredibly strong demand for specialized services and products within the electronic trading arena.
This trend was reinforced by the exchanges’ demutualization followed by their IPOs, which provided to brokers, who formerly owned the venues, sufficient capital to invest in infrastructure and technology, at the expense of losing the subsides that formerly kept some of them alive.
Without this steady inflow, players had to pursue other options to generate commission and their business models became increasingly linked to their choice of technology.
Their options were:

  1. Buying technology from an Independent Software Vendor (ISV), which creates dependency, but provides the assurance that the provider is fully focused on its core business;
  2. Acquiring and merging with an ISV or another broker, which might be more expensive, but provides the assurance that the firm is incorporating a proven and tested solution as well as the knowledge base;
  3. Developing the solution in-house, which might not be the quickest solution, but is definitely the option with the lowest cost prospects and highest knowledge aggregation rate.

In fact, the most appropriate model depends on a firm’s electronic business size, its technological maturity and its willingness to spend on both IT capital as well as personnel expenditure. However, it has been noticed that the most agile and sophisticated independent firms are being targeted by the bulge-bracket brokers and investment banks willing to increase their electronic operations.
The results of these unions are firms that evolve faster than independent ones, as they have more capital and more solid balance sheets. They are also faster than traditional full-service broker-dealers, since they are leaner with more specialized staff, and are focused on moving ahead of the market in identifying new trends.
As observed in more mature markets, it’s possible to foresee that with more fire power, large brokers will establish a technological barrier that will prevent mid-tier houses from effectively participating in the game, thus generating more consolidation and even the disappearance of some firms. Meanwhile, smaller and more specialized firms can focus on niche markets, thereby protecting themselves from being highly affected.