The Brazilian equities market has embraced electronic trading, tempting in US and European high-frequency traders, but further innovation may be hampered by central counterparty and market structure issues, according to the latest report from research firm Aite Group.
The report, ‘Brazil: The best of the BRIC’, notes that 40% of the trading volume on BM&FBOVESPA, the domestic equities and derivatives exchange, is executed via direct market access (DMA). As a result, says the report, more local electronic brokerages are being established, with more than 20 firms now offering DMA services in the country. However, the current cost of installing DMA may deter international firms from entering Brazil, says the report, with a 10-megabit-per-second line costing around R$8,000 (US$4,300) to lease per month.
Algorithmic trading is also growing in the country, although it is still a far cry from the level seen in the US. According to the report, algorithmic trading is still of a fairly low frequency – one algo trade every one or two seconds – with an offer/fill rate of 75:1.
The growth in electronic trading has also encouraged high-frequency traders to the region. As a result, the report predicts that high-frequency trading and co-location – hosting a client or broker trading system within the data centre of the market to ensure minimal latency – will increase dramatically in 2010, following its introduction to the market on 29 June this year.
“High-frequency traders from the United States and Europe are looking at the Brazilian market as a place for expansion, and the exchange is working overtime to welcome them with open arms,” said Paul Zubulake, senior analyst, Aite Group and co-author of the report. “By offering server co-location for the first time, the BM&FBOVESPA has made the initial step in attracting this new breed of trader.”
However, the report also observes that future development could be hampered by the lack of competition in the exchange and clearing space. BM&FBOVESPA was formed from the merger Bovespa Holdings and the Brazilian Mercantile and Futures Exchange, and also incorporates the CBLC, the Brazilian clearing house and central securities depository.
Nevertheless, competition in the region is expected within the next three years, as CVM, Brazil’s domestic regulator, has not imposed any limits on competition within the exchange or clearing space.