Commodities and commodity derivatives remain a strong growth area for global trading. The lure of markets rich in natural resources combined with the reassurance offered by political and economic stability has opened up the region in the eyes of multinational banks and their investors.
If the political and economic structure of these countries is now considered stable and safe, then so too are their capital markets.
The final factor in the growth of foreign interest is the improved regulation and supervision of markets. Mexico's banking and securities regulators, including the Comisión Nacional Bancaria y de Valores (CNBV), Bolsa Mexicana de Valores (BMV), and Asociación Mexicana de Intermediarios Bursátiles (AMIB), have worked to bring the nation’s corporate-governance guidelines in line with international norms.
Additionally, both the banking and securities regulator of Brazil, the Comissão de Valores Mobiliários CVM, and the BM&F Bovespa are implementing regulatory and market-structure changes that will have an impact on the way exchanges and brokers operate.
That general trend has been given extra impetus by the region’s weathering of the financial crisis. Broadly speaking, countries in LATAM had high levels of international reserves, manageable current account imbalances, low debt and minimal exposure to “toxic” assets and foreign funding. Weaknesses in the U.S. dollar, rapid growth in commodity prices and the consequent influx of capital have undoubtedly helped.
If the economic crisis can be viewed as an example of what economists term “creative destruction,” then LATAM is regarded as a solid foundation for the next period of growth.
Consequently, local brokers are looking at two distinct groups of potential customers.
The first is, inevitably, foreign buy sides who need access to local markets in the traditional manner. The second, and equally important, is foreign brokers who choose not to set up their own local establishment and instead join the exchanges themselves. Their wish is to route orders to partners who are member brokers, and by so doing, gain access to LATAM markets for their clients. In addition, these local brokers are also keen to expand and enhance the range of services they can offer to other local players as well as to the international community.
Of course, these broad brushstrokes about the LATAM region hide some important differences in the capital markets of each Latin American country.
In Brazil, where local firms are well-established, the use of at least a basic EMS is fairly common. But following the merger between the BM&F and Bovespa exchanges, the new firm BM&FBovespa is focusing on unifying its two disparate technological platforms into one. In general, old technologies and platforms are being replaced with more modern and often FIX-based alternatives, and a new unified gateway and market data feed are planned.
High-frequency and algorithmic trading are of the most interest and importance in Brazil, as compared to Mexico, where pairs, basket, and algorithmic trading is growing. Mexican markets also see the highest number of market makers in ETFs in the region. The penetration of truly comprehensive trading platforms in Mexico is limited at present, but the demands of foreign investors are likely to change this going forward.
Both countries are now facing new regulations and market-structure changes. In Brazil’s case, there is a high demand for DMA-type 2, 3 and 4 for equities and derivatives, which highlights the need for pre-trade compliance checks.
Mexico’s Circular Única de Casas de Bolsa, which contains the Comprehensive Review of Standard Operations (RINO), will significantly improve trading operations in line with international practices. It introduces new commands, agility in price formation, and faster insertion and removal from positions to create an environment that is more conducive to program trading and algorithm-based operations. It will adopt standards for DMA trading and enable brokers to adopt multiple pipes to the exchange.
In contrast, despite growing trading volumes, the capital markets in Chile have little reliance on technology. However, the exchange has now upgraded its electronic trading engine to accommodate increasing volumes resulting from new DMA and algorithmic flow. Fidessa has recently worked with Celfin Capital, one of the country’s leading investment banks, and as part of that deal, Fidessa has been building a direct electronic link to the Bolsa de Comércio de Santiago, a move that will help open up the market to more international investors.
The LATAM markets may have their own particular features, specific regulatory issues and cultural practices, but the development of technology use will almost certainly follow the same trajectories seen in the more mature markets of North America, Europe and even Asia.
The technology imperative
Since technology takes such a central role in the development of wholesale markets, the rate of growth in the market value of trading technology is similarly expected to be significant in LATAM. A rise in the number of positions on the trading floor will almost certainly be accompanied by an increase in demand for platforms to facilitate the rapid implementation of electronic trading, coherent risk management, and distribution of market data.
But as the countries of LATAM take their place on the global trading stage, and the pool of competitors gets broader and deeper, greater levels of sophistication will be required.
We can expect the internalization already seen in foreign markets to spread and markets to fragment as they have elsewhere. Trading between countries and cross-listing will inevitably increase. Systems for powerful, resilient order management — which can handle inbound/outbound international order routing, seek out and hit appropriate liquidity, offer comprehensive algos and basket functionality upstream of the EMS, and aid compliance — will penetrate further into the market.
In addition, while an investment in technology will enable innovation as well as provide a platform for new strategies, it is also an indication to prospective buy-side clients that the sell-side firm is a well-run, well-regulated, and forward-thinking; a safe and trusted partner. As scrutiny from regulators increases hand-in-hand with more stringent risk management requirements, this is a critical factor.
It is also the foundation of the return-on-investment calculation that must accompany any investment in technology. The simple fact is that in Mexico, Chile and Brazil (the most advanced markets in LATAM), investment in sophisticated technology pays dividends in terms of the number and value of the customers it will attract.
Firms that can offer comprehensive functionality and a choice of algorithmic trading options, as well as the necessary membership to the appropriate venues, are inevitably more attractive. Returns can be measured in the increased volume of trades being handled. In fact, it is possible to extend this idea and state that without the technology and the functionality it offers, simply participating in the markets will become more difficult by degree.
Vendors are now extending functionality to adhere to regional market requirements, incorporating local market data into their trading platforms, building local market gateways and providing tools enjoyed by counterparts in other regions such as Europe, Canada, Asia and the U.S.
Flexible technology providers are working with firms in LATAM to develop systems to meet their needs, to facilitate electronic trading and to ensure that technology plays its part in the development of capital markets. Costly and time-consuming in-house development of proprietary systems is no longer necessary.
And so the question is no longer whether a firm can afford to invest in technology, but whether it can afford not to.