October 26, 2010

High-frequency trading may be poised to take over the world.

While high-frequency traders in the United States and Europe increasingly are looking to expand into emerging markets, exchanges in places such as Brazil and India have been actively increasing their capacity in terms of lower latency and throughput. At the same time, regulators in these markets are relaxing their rules to boost electronic trading and their competitiveness in the global marketplace.

"Brazil has become the hottest market in the world in the last two years for algorithmic trading," asserts John Bates, CTO and cofounder of Apama, Progress Software. "Even when the U.S. markets were in the depths of despair last year, Brazil was very hot. And improving latency and the electronic nature of the markets there were a big contributing factor."

Trading volumes on Bovespa, Brazil's cash exchange, and the Brazilian Mercantile & Futures Exchange (BM&F) - which have since merged into BM&FBovespa - have grown tenfold in the past 10 years, says Martin Koopman, an independent analyst to the securities industry who wrote the TABB Group report, "Latin American Electronic Trading: Caliente!" [Koopman recently began serving as head of strategy for NYSE Technologies.] "Locals are trading more - you have a blend of Brazilian institutions, a growing number of hedge funds and quite a sophisticated group of broker-dealers," he notes. "But now there's a lot of international interest in the market, too. High-frequency firms in Brazil are deploying volatility and arbitrage strategies."

According to Marcio Castro, IT director - systems development, at BM&FBovespa, "We are coming to a stage of great maturity in our markets, after three years of working hard to promote electronic trading. As a result of this maturity level, we see more and more CEP [complex event processing] tools ready to connect to our markets."

Building Out Local Capabilities

One of the first brokerage firms in Brazil to adopt electronic trading and establish a dedicated electronic trading desk was Sao Paulo-based Agora Corretora de Titulos e Valores Mobiliarios, a division of Banco Bradesco and one of the largest brokers in Brazil's securities industry. Carlos Barros is a senior analyst on Agora's electronic trading desk.

"The market is evolving very fast," he relates. "Clients are getting more demanding. We are helping them not only by building our own strategies but also by providing them with the best infrastructure."

Agora recently launched a suite of proprietary algorithms for equities and options powered by the Progress Apama Capital Markets Platform that offers a wide variety of new alpha-seeking and execution strategies, Barros reports, adding that Agora customers can access these new algorithms remotely through an intuitive web interface.

Meanwhile, in June StreamBase announced that its CEP platform had been extended to connect to the Brazilian exchange, enabling the vendor to provide algo trading firms with low-latency connectivity to the exchange, according to the technology provider. The U.S.-based vendor also announced recently a partnership with Sao Paulo-based Alphastream, a provider of professional services and tools to build next-generation electronic trading systems.

"Every single month brokers there are launching new algorithms into the market," Koopman, the analyst, says. "Prop trading firms from Chicago are moving down there one every few months, setting up their trading engines colocated at the exchange and trading high-frequency [strategies] against local trading shops. ... And the international exchanges - NYSE, CME, Nasdaq OMX - are all very keen to partner with the local exchanges."

Creating a Friendly Regulatory Environment

Recent regulatory changes in Brazil also have been giving an added boost to electronic trading. "On Aug. 20, 2010, we got the approval of the regulator CVM [the Comissao de Valores Mobiliarios, Brazil's equivalent to the U.S. Securities and Exchange Commission] to have new ways of access to the exchange," relates BM&FBovespa's Castro.