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Brazil: High Frequency Trading in Brazil: Mirage or Miracle?

Christian Zimmer, Head of Quantitative Trading and Research, and Hellinton Hatsuo Takada, Quantitative Trader, of Itaú Asset Management reveal the truth about high frequency trading in Brazil.

Conference panels, discussions and articles on High Frequency Trading (HFT) generally start with its definition. The term HFT is like ‘Cleopatra’ – sexy and mysterious and everyone is keen to know more about it. But the term HFT speaks for itself, so is it wasting time to go over it again?

Probably, because the term ‘high’ only has meaning relative to an external point of reference, just like cold, hot, sweet or other adjectives. This subjectivity is all the more interesting, as it is extremely difficult to measure an investor’s  brief holding period in most financial markets and, therefore, determine if it really is ‘high’. Unlike in the US, where the exchanges do not register the origin of the trade, Brazilian regulation allows BM&FBOVESPA to identify the final client on every trade. Consequently, it is much easier to measure the holding period of an investor for each asset. Also, this rule is the means by which the exchange determines whether an investor’s trade is classified as a ‘day trade’ and is thus eligible for reduced fees.

Naturally, BM&FBOVESPA does not classify a trader opening a position in the morning and closing it at the end of the day as a high frequency trader. There should be far more trading than this to qualify as HFT.  But how much more? It depends on the exchange’s criteria and reference point for ‘high’.

Figures for HFT published by BM&FBOVESPA in their April 2011report show 3.9% of the BM&F segment is high frequency and 5.9% of the BOVESPA segment. Consequently, the reduced fees are presented to the Brazilian trading community as less of an issue, as they say there is evidence of HFT taking hold. But HFT volume is not really increasing and is still far off the US figures which are often cited at around 60-70%. After carefully observing BM&FBOVESPA market prices, it is easy to conclude that it would take some time (possibly hours) to have a change in the prices sufficiently large enough to pay the transaction costs.Remember that HFT strategies are very sensitive to transaction costs.

Our suggestion is to step away from making subjective references to ‘high frequency’. Instead, one should look at the underlying trading strategies. The incentives an exchange should create to attract flow must be adjusted to the strategies that are really needed. Each strategy deserves a different set of policies and this will help the diversification of the traders’ strategies.

A trader using a market maker strategy can live with exchange fees as long as the bid-ask spread is sufficiently high. If the spread narrows, the costs become crucial and the exchange must lower the fees in order to keep this client in the market. On the other hand, a directional trader has different issues; if the fees are high, a trader must wait longer for a relevant price move so that they can capitalize on their position. Contrary to the market maker, the directional trader loves to see narrow bid-ask spreads. There would be no need to lower fees when the spread is close. The same is true for the statistical arbitrage traders.

When looking at the third party analyses of HFT in the international markets, we often see that the most common strategy is the market maker approach. This fact is strongly influenced by market fragmentation, which we do not have in Brazil. Fragmentation creates new intermarket trades, which could qualify as arbitrage trades, but not necessarily as market maker trades. Fragmentation also makes exchanges and other venues compete for the customers that provide liquidity and, as a result, give incentives to market makers. As mentioned above, Brazil does not have a fragmented market and BM&FBOVESPA does not see it necessary to ask for more liquidity. At least not as long as international capital flows are strong and increasing. Liquidity is needed in second tier shares and below.

It remains to be seen whether the inventive BM&FBOVESPA program to exempt the officially designated market makers from exchange fees will be enough to stimulate other participants to trade. At least theoretically, this provides an entry/ exit point for statistical arbitrage traders. However, as long as the allowed spreads can be as large as 1%, the strategy might not be necessarily profitable. At this moment it is worth noting that most of the Brazilian statistical arbitrage trades are longshort trades in stocks focusing on preferred-common stock relationships (in Brazil they are known as PNON, with PN standing for preferred stocks and ON for common ones).

It is also interesting to look at statistical arbitrage trades that are latency dependent, i.e. true arbitrage trades. Are these the ‘true’ high frequency traders? If there are only a few trading opportunities per day, it does not seem as if BM&FBOVESPA could classify them as high frequency. Latency sensitive traders typically use what the exchange refers to as the DMA3 (clients directly sending orders through a connection to the exchange) or DMA4 (co-location) categories. Trades through these categories can easily be measured. Unfortunately, the ability to measure the latency sensitive flow is lost because the DMA3 category is also used for any direct sponsored customer trades, so all that remains is to  measure the flow from the co-location model.

If we use the DMA4 numbers as the reference point for HFT, then we reach a HFT participation figure of 2.8% in the BM&F segment and about 2% in the BOVESPA segment (as at April 2011). The BM&FBOVESPA DMA4 measurements are significantly lower than their HFT percentages. This suggests they accounted additional strategies into this pool, such as market making strategies. Theoretically market makers could have contributed to this figure, but because of a very narrow spread in the high volume stocks and high fees, it is reasonable to assume that the market making strategy does not contribute too much to the HFT volume.

One might argue that there are still the directional trades. Yet, as this strategy needs a certain price move before it can make money and the number of trades per day is limited. On the other hand, the number of traders that might be using this strategy is not limited, as the models are nearly all different. There are only about ten Brazilian players able to successfully run intraday directional trades. Perhaps we should conclude that the international players have better models or a better understanding of the market?

Recently, BM&FBOVESPA announced a new pricing model for high-frequency traders, which uses the Average Daily Trading Value (ADTV) to calculate fees in its equity market. Fees range from 0.019% for R$20 million ADTV up to 0.01% for firms trading over R$500 million ADTV. Ironically, almost no firms were able to qualify as ‘high frequency’ players within the exchange’s cost reduction program.

Source:FIXGloabalTrading, 15.06.2011

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Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, Trading Technology, , , , , , , , , , , , , , , , ,

Mexico Credit: Banorte beats Brazil´s Itau as acquisition boosts lending

Bonds sold by Grupo Financiero Banorte SAB, Mexico’s fourth-largest bank by outstanding loans, are outperforming debt from financial peers in Latin America after an acquisition helped the company boost lending by 29 percent.

The 6.1 percent rally in Banorte’s dollar bonds due in 2021 this year compares with an advance of 5.7 percent for bank debt in the region, according to data compiled by Bloomberg and Credit Suisse Group AG. Similar-maturity bonds sold by Banco Itau Unibanco SA, Latin America’s biggest bank by market value, gained 6 percent during the same period. Debt due in 2020 issued by Bancolombia SA, Colombia’s biggest bank, rose 5.5 percent.

Banorte, based in Monterrey, Mexico, is tapping into a growing demand for credit in Latin America’s second-biggest economy. Total loans for Banorte expanded 18 percent in the past year, the most since 2008, according to Mexico’s National Banking and Securities Commission. Banorte said on July 25 that its acquisition of Ixe Grupo Financiero SAB helped increase its loan portfolio to 312 billion pesos ($26.4 billion) in the second quarter from 242 billion a year earlier.

“They grew at a healthy pace in the quarter and I’m expecting it to continue,” Natalia Corfield, an ING analyst who recommends investors buy Banorte’s bonds, said in a telephone interview from New York. “The banking sector has a very good growth potential.”

The yield on Banorte’s bonds sank 47 basis points, or 0.47 percentage point, this year to 4.72 percent, according to data compiled by Bloomberg. Mexican government dollar notes that mature in 2020 yield 3.45 percent.

Credit Expansion

Pedro Rodriguez, a spokesman for Banorte, didn’t return a phone message seeking comment.

Yields on Sao Paulo-based Itau’s bonds due in 2020 fell 41 basis points during the same period to 5.39 percent. Itau declined to comment through an e-mailed statement.

Mexican banks including Banorte are benefiting from the expansion of credit to a larger share of the population, said Alonso Madero, who helps manage about $5.5 billion in debt at Corp. Actinver SAB. The country’s private credit measured as a percentage of the gross domestic product was 21.8 percent in 2009, compared with 45 percent in Brazil, according to ING.

“Banks could lend a lot more,” Madero said in a telephone interview from Mexico City, “It’s very clear that this is how they could grow. There’s a big potential growth to capitalize on because of the low banking penetration.”

Growth Outlook

Banks in Mexico are increasing lending as the economy may grow “a little bit more” than 4.3 percent this year, Finance Minister Ernesto Cordero said in an event in Mexico City yesterday. Gross domestic product expanded 5.4 percent in 2010, the most in a decade.

Slowing growth in the U.S., the destination for 80 percent of Mexico’s exports, may curb demand for credit in the Latin American country, said Araceli Espinosa, debt analyst at Scotia Capital.

A report yesterday showed that service industries in the U.S. expanded in July at the slowest pace in 17 months as orders and employment cooled, indicating the biggest part of the economy had little spark to begin the second half of the year. Economic figures in the U.S. in last two weeks have shown declining home sales, weaker factory orders, waning consumer confidence and the first decrease in household spending in two years.

“If the economy is not growing, the loan portfolio for the banks is not going to grow,” Espinosa said in a telephone interview from Mexico City.

Yield Spread

Yields on futures contracts for the 28-day TIIE interbank rate due in May were unchanged at 4.99 percent, indicating traders expect the central bank will wait until that month to raise benchmark borrowing costs from a record low 4.5 percent.

The extra yield investors demand to hold Mexican government dollar bonds instead of U.S. Treasuries was unchanged at 128, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years rose 1 basis point to 112, according to CMA. Credit- default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

The peso advanced 0.2 percent to 11.8193 per dollar, extending its advance this year to 4.4 percent.

Banorte is likely to exercise a call option on its bonds in 2016, ING’s Corfield said. The yield to the 2016 call date on the company’s notes may drop 50 basis points from 6 percent yesterday, she said. A call is a contract that gives the holder the right to buy a security at a set price within a set period. The holder of the call is not obligated to buy the security.

‘Well Positioned’

Banorte has used takeovers, including the 2001 acquisition of Bancrecer SA, to grow into a national financial group from a north-Mexican regional lender since the country’s banking industry collapse in 1995.

Banorte reported a 24 percent increase in second-quarter net income to 2.05 billion pesos. Ixe added 119 million pesos to the profit.

“It’s a benign environment for Mexico now and Banorte is well positioned to benefit from it,” Corfield said.

Source: Bloomberg, 04.08.2011 by  Veronica Navarro Espinosa vespinosa@bloomberg.net; Andres R. Martinz amartinez28@bloomberg.net

Filed under: Brazil, Latin America, Mexico, News, , , , , , , , , , ,

Brazil – Low Inflation to Boost Brazilian Stock Market – Monthly Allocation – June 2011 -BANIF

At best, things should be as bad as predicted

For multiple reasons, we have a negative view on the international market for June. 1) There is evidence of a slowdown in the US economy. 2) In the Euro Zone, following the relatively well made financial aid package for Portugal, the Greek debt problem has become more acute, with evidence of fiscal targets not met and a lack of political will to implement further measures. 3) China has displayed signs of an economic slowdown after strong 1Q figures.

Despite this negative view, we believe in a mild negative evolution of the markets, with no large factors to cause major changes. The market has revised estimates for economic activity downwards and now, in a best-case scenario, we believe in a reality as bad as predicted. The most important single issue to monitor is probably the evolution of the Greek problem, which disruption we believe is certain and dependent on a strengthening of the European financial market to absorb its impact; a condition not yet achieved. A meeting with European leaders will take place on June 24, which might be a catalyst if an announcement of any decision to favor the short term solution for the Greek difficulties occurs.

Local inflation estimates approach zero

Most estimates for June’s inflation are nearing zero. The Top Five survey, for instance, now has 0.06% for the IPCA index. Considering that the reduction is sharp, coming from monthly levels from around 0.8% to near zero (May figure is likely to remain above halfway between one end and the other), we believe that there is still some skepticism in the market of this downward course. With the release of hard data confirming the expectation of low inflation, available around the third week of the month in the form of the previous release of indexes for June, we foresee an increased optimism driving the market prices up.

We believe a materialization of the positive local scenario we predict will have greater influence on the local market than the dimmer international scenario, leading to a rebound in local prices. As inflation has been the most important economic factor monitored, an ease in its pace would cause a wave of optimism.

Having this positive view in mind, we left our previous cautious stance and, to benefit from a rebound in the local stock market, changed our suggested portfolio significantly. We added Copasa and Itau (5% weight each) and increased the weights on Even, Eztec, and Lojas Renner (all from 5% to 10%). Additionally, we withdrew Telesp, Tiete and Tractebel.

Source: BANIF CVC, 01.06.2011

Filed under: Brazil, Latin America, News, , , , , , , , , ,

Fidessa expands connectivity network with nine new Latin American brokers in Mexico and Brazil

Fidessa group plc, provider of award-winning trading solutions for the buy-side and sell-side, today announced the addition of nine brokerage firms, with operations in Brazil and Mexico, to its global connectivity network. This extends the range of order execution opportunities for firms looking to access the Latin America (LATAM) markets.

BES Securities, Credit Suisse Hedging-Griffo, Fator Securities, Grupo Bursatil Mexicano, ICAP Brazil CTVM, Interacciones Casa de Bolsa, Itau Securities, IXE Casa de Bolsa and XP Investimentos are now all available on Fidessa’s network, and join previously announced LATAM firms including Planner Corretora De Valores and Casa de Bolsa Finamex.

Access to these brokers’ services is available via direct FIX connection or fully integrated into Fidessa’s own products – including the Minerva OEMS and EMS Workstation for the buy-side, and its sell-side trading platform solutions.

Martin Hakker, EVP marketing at Fidessa comments: “We’re committed to expanding our global network to provide the broadest possible range of execution services on a global basis. We’re seeing increased demand in the LATAM region from both buy-side and sell-side firms as institutions in the region continue to embrace electronic trading technologies and international firms look to the region to expand the trading and execution services they can offer their clients.”

Hakker adds: “Having joined Fidessa’s network, these brokerage firms are now able to offer their market-leading DMA, care, and algorithmic trading solutions to both the buy-side and sell-side via one of the largest trading networks in the industry.”

Fidessa’s connectivity network links over 2,300 buy-side institutions to more than 400 brokers and 120 markets around the world, providing a “one-stop-shop” for best execution services. Fidessa group serves around 24,000 users across more than 730 clients around the world and are used by more than 85 per cent of tier-one financial institutions.

Source: Fidessa, 03.11.2009

Filed under: Brazil, Exchanges, FIX Connectivity, Latin America, Mexico, News, Trading Technology, , , , , , , , , , , , , , , , , , , , , , ,