Open outcry trading on the BM&F, the Brazilian derivatives exchange, will end on June 30. The move completes a migration to electronic trading that began in 1990 on the Bovespa, the São Paulo stock exchange with which the BM&F merged a year ago.
If BM&FBovespa has been slow to complete a change made years ago by many of the world’s better-known exchanges, it is moving quickly to challenge them for world leadership.
It is already bigger by market value than NYSE Euronext, Nasdaq OMX and the London Stock Exchange. Technology being introduced this year should keep it growing quickly.
The exchange also has its own clearing house, an added benefit at a time when clearing has become central to the clean-up of the financial system.
Bernardo Mariano of Equity Research Desk, a New York research company specialising in exchanges, says: “Brazil has a very interesting macro story, and this is a commodities-based exchange, which makes it a great hedge against global inflation,”
“Add to that that they are just implementing direct market access and co-location, and this will help it expand very significantly.”
In fact, direct market access – or DMA, by which traders can directly access an exchange’s trading system – has been operating on the equities side since 1999.
But change at BM&FBovespa is increasingly being driven by traders’ demands for “multi-asset” trading of equities, futures and options on one exchange. This factor has driven similar mergers, such as the combination of the Australian Stock Exchange and Sydney Futures Exchange in 2006.
While the equities side took its time to adapt to electronic trading, recent changes have happened much more quickly. In interest-rate futures contracts, one of the BM&F’s highest-volume products, it took only two months for the shift to electronic trading to occur. This compares with about nine months when the Chicago Mercantile Exchange (CME) underwent the same process with its flagship interest rate contract in 2004.
BM&FBovespa is also upgrading on the equities side. Until last month, its electronic system limited the number of “messages” received from equities traders – offers to buy or sell that may or may not become trades – to about 770,000 a day. This fell far short of demand, especially from overseas traders, who typically send nine messages for every completed trade.
BM&FBovespa has been charging extra fees to traders with high ratios of messages to trades, adding a considerable cost to their activity.
The system is being upgraded to take 1.5m messages a day: enough, says Paulo Oliveira, director for new business, to ensure traders will be able to operate freely.
But the pressure is on BM&FBovespa to keep advancing. Frank Piasecki, president of ACTIV Financial, a global market data provider, says: “It needs to continue targeting sophisticated traders who capitalise on algorithmic and automated trading strategies and produce high trade volumes”.
BM&FBovespa is moving to address this and will open an office next month in London, home to a huge concentration of algorithmic traders. The group already has offices in Shanghai and New York.
The biggest step it has taken overseas was a deal with the CME in February last year, when the CME swapped 2 per cent of its own shares for 10 per cent of the BM&F. Customers of the two exchanges can trade directly on both.
More technology will be introduced next week, when the exchange joins the global trend to “co-location,” in which big customers can install computer servers inside the exchange’s data centres to enact high-speed automated trades that seek out opportunities between different asset classes.
Source: Financial Times, 08.06.2009 by Jonathan Wheatley and Jeremy Grant
Record monthly inflow
Assets traded on the BM&FBovespa have been among the best performers in the world this year as investors have resumed the search for yield interrupted during the acute phase of the global economic crisis in the last quarter of 2008.
The widespread belief that Brazil is much better placed than many other countries to emerge relatively unscathed from the crisis has added to global demand for its assets.
The main Bovespa equities index is trading at about 53,000 points, some 20,000 below its peak last May but 24,000 above its low point in March.
As the BM&FBovespa invests in new technology to broaden its international appeal, foreign investors already represent a big part of its business.
They accounted for about 35 per cent of volume traded on the Bovespa equities market last year, up from 24 per cent in 1994, the year Brazil conquered runaway inflation and embarked on a new era of relative macro-economic stability.
Brazilian individuals and institutional investors account for about 27 per cent each, with the rest coming from other Brazilian companies and financial institutions.
On the BM&F derivatives exchange, foreigners are less dominant. They make up about 20 per cent of trades, compared with about 47 per cent for local financial institutions and about 22 per cent for local institutional investors.
May was a record month for trading on the equities side, with total volume of more than R$108bn ($54.6bn). Average daily volume is running at about R$3bn – down from a peak of more than R$4bn in May last year, but up from less than R$200m a day in 2002, when investors were much less sanguine about Brazil. Foreign investors delivered a net inflow of R$6.08bn in May – the biggest monthly inflow ever.
The currency, which slumped to R$2.50 to the US dollar in December from a peak of R$1.57 in August, has since recovered to about R$1.98.
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