By Brian Ross
FIX Flyer’s Brian Ross briefs readers on the latest from Mexico including the regulatory and technology upgrades.
In the last 12 months dramatic changes have occurred at Mexico’s stock exchange and among its brokerage clients. Cross border partnerships, technology upgrades, new FIX infrastructure and business friendly regulatory changes have opened the Mexican market to high frequency trading (HFT).
While US regulators can be seen to scold HFT firms, the Mexican market has opened its arms. The Mexican Exchange (BMV) and its brokerage firms have upgraded their infrastructure and sought business opportunities north of the border. Earlier this year after the CME Group and the BMV signed their partnership, high frequency traders on the CME Globex trading system began to route orders to the Mexican Derivatives Exchange or MexDer. Today 90 percent of average daily volume on the MexDer comes from high frequency traders north of the border.
Mexico’s brokerage firms have completed significant infrastructure upgrades. Last spring only a few brokers in Mexico could handle a highfrequency hedge fund client and many Mexican brokers could process no more than one connection to the Bolsa Mexicana de Valores (BMV) at a time. The landscape has changed quickly and improvements in broker and exchange systems have ushered in a new capacity for speed in the transmission and execution of orders in Mexico.
Over the summer a major milestone occurred for the industry. Working with the BMV, Mexico’s brokers completed an industry-wide upgrade to FIX 4.4. The top 25 brokers are now certified with FIX 4.4 to the BMV. Leading the way, are brokerages like GBM, Interacciones, Actinver, UBS Mexico, IXE and others.
Now that Mexican brokers speak FIX 4.4, all of the order routing to the BMV can now be done through FIX allowing the BMV to retire the antiquated SETRIB protocol. The only way the BMV will allow Mexican brokers to continue to use SETRIB is by paying excessive fees, and even this will not be allowed by the end of 2011. Retiring SETRIB sets the stage for more positive changes in the industry and at the BMV.
Work is already underway to upgrade the BMV’s trade matching engine. The existing engine was built in the 1990s for a Tandem mainframe. Retiring the Tandem has many benefits. Faster order matching and processing is high on the list. In addition, more choices for application and software vendors and significant cost savings are expected. Retiring the mainframe will also eliminate the scheduling nightmares associated with the limited availability of the central mainframe for testing with the broker community. The new matching engine will be hosted on modern Unix based hardware. The release of the new matching engine and infrastructure is planned for the first quarter of 2012.
Another important milestone is the availability of a state-of-the-art co-location facility at KIO Santa Fe. The BMV infrastructure is located here and starting in October it will be easy for brokers and third party providers to collocate order routing and market data in this hosting facility leading to high throughput low latency services.
While all of the infrastructure and matching engine upgrades are momentous, they would bear no fruit without the simultaneous modernization of Mexican regulations. The initiative to modernize Mexico’s regulations, called RINO, began a year ago and phase two is due to rollout in the fall of 2011. The goal of RINO is to conform Mexican regulations to international standards. By converging with international standards, regulators hope to bring more international order flow and greater liquidity to the market, resulting in increased investment in the Mexican market.
While regulations in the US like Sarbanes Oxley and Dodd-Frank can be seen to drive businesses offshore, the regulatory changes in Mexico are removing handcuffs from businesses and facilitating opportunities. The first step forward occurred early this year with RINO I. RINO I allowed brokers to have multiple channels to the BMV’s electronic trading system. Previously all orders were in a single queue. Multiple access points per broker provides more flexibility in executing strategies and handling client requests, including separate BMV channels for program trading and orders called into the trading desk. RINO I also eliminated sizebased criteria from order management, thus leveling the playing field in the processing of orders. RINO II takes effect on October 10, 2011, bringing more modernizations including pegged orders, improvements in crossing operations, average price operations, price delivery regardless of volume, and decimal bids for fixed income securities.
Crosses, in which a brokerage carries out a transaction through the stock exchange between two of its clients, were permitted previously but the rules were very arcane. Starting in October, the crossing operations will be vastly simplified allowing clients to simply choose whether to cross inside or outside the spread. With this modernization, the BMV hopes to repatriate orders that brokers would previously carry out in the US, where crossing orders was possible using ADRs in dark pools or at the NYSE.
In addition the RINO II regulations a very important new mid-point hidden book order. The orders execute at the midpoint, broker anonymity is guaranteed and the order priority is determined by volume. This is effectively a dark pool. Similar to Xetra, this new BMV order helps the market participants and simultaneously protects the BMV from providers toying with moving into the Mexican marketplace.
As the regulations modernize and the FIX infrastructure hardens, opportunity beckons. Brokers are beginning to push for more high frequency trading algorithms, more efficient routing of international orders, and more sophisticated risk controls, all of which will attract even more international business. As the need for speed grows, co-location previously offered by the exchange may become more strategic, particularly to brokers wanting to attract high frequency traders.
All of this progress was made possible in large part because of the exchange’s demutualization and subsequent listing in 2008. The demutualization coincided with rule changes allowing Mexico’s pension funds or AFORES to invest. Before the rule changes, the AFORES were forced to invest almost entirely in short-term government paper. Today, Mexico’s pension funds are allowed to invest up to 25 percent, in individual stocks and shares and 12 percent in a hybrid of corporate debt and equity capital to allow companies to raise funds to expand businesses.
Considered together, regulatory improvements and infrastructure updates have morphed the BMV and the Mexican brokerage community into a thriving and modern marketplace. The BMV reported a 22 percent jump in earnings last year, with operating income increasing 70 percent in the last three months. A record six initial public offerings made it to market last year and overall trading volumes rose 50 percent in 2010. This year Mexico’s IPC index has tested and hovered near record highs.
In 2011 there are fewer IPOs, but trading volume remains strong. The order-routing agreement signed with Chicago’s CME Group has opened Mexico’s derivatives market to the world. Now, electronic trading infrastructure and investor friendly regulations have set the stage for act two.
Successful Integration of Exchanges in Chile, Peru and Colombia: MILA Update
Chile, Peru and Colombia formally combined operations of their stock exchanges on Monday June 3 2011 to form the Latin American Integrated Market (Mercado Integrado Latinoamericano, or Mila). The first operations of MILA on the Stock Exchange of Santiago were purc
hases of shares of Endesa Chile and Lan for Colombian brokers. MILA consists of the Lima Stock Exchange (BVL), the Bolsa de Valores de Colombia (BVC) and the Bolsa de Comercio de Santiago (BCS).
Chileans can now buy stocks from Peru and Colombia through local brokers who have counterparts in those countries. At the same time, foreign investors have greater and simpler access to the Chilean market. The MILA integration provides a cross listing of stocks that helps the three markets grow by providing a wider, more transparent and more complete market.
The markets are quite complementary and the synergies are important considering the growth in Brazil and Mexico. In the Peruvian Stock Exchange, they emphasize the qualifications of its mining industry, which has a strong presence in Chile, whereas Colombia has a strong energy sector with the petroleum company Ecopetrol. Regulators from the three markets have created a Supervisory Committee that meets periodically and monitors issues that arise with MILA.
Andrés Araya Falcone, CIO Santiago Stock Exchange comments “from the technology perspective, the launching of MILA has been very successful. FIX 4.4 interconnects the markets for order routing and market data. From a business perspective, trading volume as been lower than expected due mostly to external factors, such as the debt problems in United States and Europe.”
In addition, Araya adds that brokerage “tax issues and finetuning of back office systems have also affected trading volume. Even so, MILA has increased interest in Latin American Markets because this is a great idea and once these issues are worked out, we are sure liquidity and trading volume will increase.”
Expected in October is the issuance of shares from Inversiones Suramericana (Sura) who hopes to raise 1-4 billion USD to help fund the purchase of ING in Colombia, Peru, Mexico, Uruguay, and Chile, including AFP Capital. Sura announced it will pay 3.9 billion USD for the assets of ING. More than half of the shares will be offered to international investors, including AFP Capital and insurance companies in Chile. This transaction is expected on the Colombian Stock Exchange, making it available through MILA to investors in Lima, Santiago and Bogota, in addition to the United States and Europe.
Latin America has enjoyed a strong recovery for the most part it has sailed through the recession without lasting damage. Boosted by capital inflows, by record prices for commodity exports, by sound policies and by a heady expansion in domestic credit, the region saw economic growth of 6% last year and is on course to notch close to 5% this year. The region faces slower growth but not disaster. To up the pace, now is the time for reforms to boost productivity.
The main engines for growth in Latin America are China’s demand for minerals, food stuffs and raw materials – this looks set to continue – and consumption as tens of millions edge out of poverty and benefit from newly available credit.
