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TRADING AND TECHNOLOGY: Pushing the boundaries

Table-football-BrazilSystems providers for buy-side dealers are building their regional presence as investors come to Latin markets. Nick Fitzpatrick looks at how some of the players are positioned for this business.

 Brazil became the favourite emerging equity market for fund managers in September after they increased their overweight position to 41%. This was their highest level of holdings in Brazil since April, according to the Bank of America Merrill Lynch Emerging Markets Fund Manager Survey, which covered the first week of last month.

Although by the first week of October this could well have flowed out again, the fact that fund managers report a higher degree of interest in Latin America from long-term investors means greater levels of cash are likely to circulate around Brazil’s capital markets for some time to come.

Trading volumes in the country’s markets have skyrocketed by 400% in the past decade. In 2010, it saw a 67% growth in market volumes.

Meanwhile, Colombia, Chile and Mexico are also being recognised as key capital and derivatives markets. Equity trading on the Santiago Stock Exchange – which has been seeking more direct market access and algorithmic trading recently – increased Trading1by more than 30% last year. And as far as returns are concerned, in dollar terms, Colombia, Chile and Peru all returned around 40% in 2010.

With so much attention from fund managers, the providers of trading systems are seeing increased flows in the region and this fact is, in turn, spurring them on to develop their buy-side businesses in Brazil and elsewhere within Latin America. For example, London-listed Fidessa, a systems and data vendor, is on schedule to open a São Paolo office in the fourth quarter of this year.

The increased flows have been facilitated by better levels of technology and connectivity across much of the continent. Meanwhile, an initiative to centralise three key exchanges – Chile, Colombia and Peru – on one platform is also providing a powerful undercurrent of development as it is likely to bring an increase in standardisation of processes and automation, which are all essential for quick, easy and cheaper access to regional markets.

It is connectivity that is the “name of the game” for buy-side dealers, says Philippe Carré, global head of connectivity in SunGard’s global trading business. “With the explosion of electronic trading, people need to access Latin America in the same way they trade Tokyo, Europe and the US – and this needs to be multi-asset. They can’t afford to do these volumes over the phone any more.

“The key is, how do I reach my broker of choice electronically? And, in fact, how do I find a broker when the area’s new for me?

“So we’ve seen significant uptake in our services and this is why we’re increasingly concentrating on these regions.”

Roger Kahlon, buy-side account director at Fidessa Group, says: “Over and over, we hear that easy, global access has traditionally been hard to come by.” But, he adds: Trading2“It is only a matter of finding the solution that fits a client best.  The fact that we are seeing sell-side participants offering execution facilities and services from and into North American markets only confirms that this is one of the biggest infrastructure challenges for Latin American investors.”

Spiros Giannaros, vice president Americas at Charles River Development, says that while there has been a fair amount of electronic trading in Latin America, in Brazil, for example, almost all of that flow has historically been initiated by foreign nationals. As electronic trading takes hold in Latin America, domestic asset management firms and brokers are taking the opportunity to upgrade their trading systems to conduct real-time, electronic trading via the Fix (Financial Information eXchange) Protocol.

“We expect Fix-based trade activity to steadily increase in the region as local buy-side and sell-side managers realise the benefits of electronic trading and as region-specific algorithms become developed and adopted,” says Giannaros.

The lifting of local market restrictions in Latin America has given managers a wide variety of investment options and caused a massive influx of investment into the region, he adds.

“To invest internationally and start receiving some of this increased global liquidity, Charles River is seeing more and more local asset managers, mutual funds, wealth managers, and even hedge funds, seeking to replace outdated, in-house solutions and eliminate manual processes,” says Giannaros.

©2011 funds global