HFT makes inroads to Brazil and Mexico

Brazil is poised to lead Latin America in a high-frequency trading revolution, while Mexico is not far behind, according to a US research group.
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Brazil is poised to lead Latin America in a high-frequency trading (HFT) revolution, while Mexico is not far behind, according to a US research group.

Investments in technology by Brazilian exchange BF&M Bovespa have led to increases in HFT participation, with penetration in terms of equity trading volumes rising from 4% in December 2010 to 12% in September this year, said Danielle Tierney, analyst with Aite Group and author of the report ‘High-frequency trading in Latin America: Brazil blazes the way’.

“While high frequency trading volumes in Latin America are small compared to an estimated 60% of US volumes, BM&F Bovespa’s efforts to improve technological infrastructure have already unlocked liquidity in the Brazilian market,” Tierney said.

According to Tierney, much of the market’s recent HFT growth had been bolstered by a concerted push by B&F Bovespa to beef up access options – both through traditional broker-sponsored direct market access (DMA) and connecting to the exchange directly via co-location capabilities.

“Trading conducted via co-located engines, while still a small portion of overall volumes, has exploded in Brazil,” said Tierney. “Non-existent a year ago, trading via co-location is now around 5% of total equities volumes and over 6% of derivatives.”

Despite its 10-year compound annual growth rate of 22% in equities volume and 19% in derivatives volume, Tierney said Brazil had struggled to reach the higher levels of trading volume it required to support the economy’s rapid growth. “Lack of liquidity is a barrier to entry for domestic and international investors alike, especially for non-financial institutions,” she said.

Countering this lag, BVMF had invested about US$300 million into its infrastructure since 2009, with 80-90% spent directly on trading technology hardware and software.

BM&F Bovespa trades are now handled via Financial Information Exchange (FIX) Protocol 5.0, while most other tradable Latin American markets use FIX 4.4. Tierney estimated the exchange’s technology investment for 2011 will be over $100 million. A large proportion of this is being spent on Puma, a high-speed platform with a capacity of 200 million messages per day, capable of achieving 1.1 milliseconds average round-trip time.

Less than a third of the market capitalisation of Brazil, Mexico’s Bolsa Mexicana de Valores (BMV) stock exchange has also seen a rapid increase in HFT penetration, which presently accounts for around a quarter (25%) of total volume in cash equities trades.

“One year ago, the percentage of HFT in Mexico was less than half what it is now,” said Tierney. “In November 2010, the regulatory environment shifted to allow members of the exchange multiple access points for trading.”

BMV is developing its own ultra-low-latency trading platform to be implemented by Q2 2012, which is expected to spur a 15% to 20% growth in equities HFT participation and 20% to 30% growth in derivatives high-frequency trading.

But the increases in HFT come with a warning from Tierney. “While HFT activity is great for volume, BVMF may have to keep an eye on its margins as activity increases,” she said. “HFT trades are less profitable and may exert downward pressure on relative profitability as participation increases.”