Trading volumes on Latin American exchanges are soaring, with Brazil leading the charge on the strength of a commodities-based economy that emerged unscathed from the global economic crisis, according to a report by Tabb Group.
The Latin American market is carrying so much momentum that traders are increasingly opting for its exchanges over a number of major U.S. markets, with no signs of slowing down, the research found.
The report, entitled “Latin American Electronic Trading: Caliente!,” showed that while high-frequency trading of equities and derivatives is surging in the region, there’s more room for growth.
“There’s no doubt that it’s an attractive market. It’s growing fast. It’s got a good amount of liquidity,” says Martin Koopman, an independent consultant working with TabbForum. “It’s definitely less competitive now than the U.S. or Europe which have had people focused on them for years and years.”
In March, single stock option contracts traded on Brazil’s BM&FBovespa surged pass the number of contracts traded on the Chicago Board Options Exchange, the International Securities Exchange, and the Nasdaq OMX PHLX.
BM&FBovespa, the world’s third-largest exchange operator in terms of market value, traded nearly 87.5 million single stock-contracts in March, compared with approximately 79.3 million for the CBOE, around 66.6 million for the ISE, and about 58.9 million for the Nasdaq OMX PHLX.
Stock market indexes in Brazil, Mexico, and Argentina have climbed 400 percent over the last decade, prompting brokers in those nations to beef up their electronic trading services.
Meanwhile, early-mover technology vendors are seeing robust sales and high frequency trading has begun, the report found.
Koopman, who wrote the report, says the infrastructure in Latin America is similar to that of the U.S., with the main difference being that the most successful nations – Brazil and Mexico – only have one exchange each for stocks and derivatives.
“Apart from that it looks pretty similar where you’ve got fully electronic markets with pretty low latency market data feeds, low latency connections, low latency matching engines,” Koopman says. “In Brazil, you’re able to co-locate if you’re a high-frequency trading shop and you’re able to co-locate at the exchange these days well.”
Most of the optimism in the report centers on Brazil and Mexico. Historically the region’s markets have been volatile, with government policies and taxes that have made it difficult for foreign investment.
Brazil’s equities and derivatives markets, and the Mexico Stock exchange each floated shares in public stock offerings in the last 2 years.
Brazil has become the dominant economic player in Latin America, boasting the region’s largest equity and derivatives exchanges. BM&F, which is now the sixth-largest derivatives market in the world, grew 67 percent in trading volume during the first quarter, the research found.
This is largely due to foreign participation, with overseas investors responsible for roughly 26 percent of the nation’s equities volume. Foreign investors also hold 54 percent of the market’s value either directly, or through American Depositary Receipts.
“Liquidity attracts more liquidity, so in Brazil, and to a lesser extent Mexico, there’s enough trading to attract high-frequency people who are trying to arbitrage,” Koopman adds. “So there’s enough liquidity down there to get the high-frequency, the prop-trading, the algorithmic guys in to attract the big names.”
Through his research, Koopman says he discovered that prop-trading firms in U.S. financial centers like New York and Chicago are increasingly looking for a piece of the action, sending servers and experienced traders within range of the Brazilian exchange and trading away.
“There’s a lot of room for growth, a lot of opportunities there,” Koopman says. “The guys are rushing in to take advantage of that.
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio