Brokerage Model Changes
Along with the technological evolution, the brokerage model as a whole is starting to change in Brazil. While the retail client is attracted by low commissions and a wide range of services, products and a professional advisory, the institutional client is starting to assume responsibility for some of their executions, and is much more interested in state-of the-art technology, low latency infrastructure, access to algorithms, and selected liquidity.
The force driving these changes for the buy-side is the role played by automated algorithmic execution models in their strategies. Whether provided by brokers or developed in-house by the most sophisticated hedge-funds and proprietary desks, these models objectively analyze the determining factors, to slice and submit orders to the market in a fashion that no human trader can keep up with, while the execution performance is being measured in real time by sound TCA models.
As seen in the graph below, this trading style results in smaller tick sizes, forcing orders to shift from mere vanilla buy/sells to more sophisticated execution strategies, which is also changing the relationship between the buy-and sell-side.
Along with technology, this relationship is increasingly based on the broker’s ability to provide natural liquidity for higher-tier names, less information leakage and facilitation for large blocks.
In regards to the market structure, we notice that even though there are similarities, the evolution of the Brazilian marketplace is different from other countries. Let’s take for example, the U.S after the Order Handling Rule and Reg NMS, Europe after MiFID, and Asia after the adoption of best execution: all of them have seen a proliferation of ECNs, MTFs and Dark Pools. This has made the liquidity more fragmented and ‘darker’, creating a problem for price discovery and raising concerns in relation to practices that could be potentially hazardous for small or individual investors.
In contrast to other markets like US, Europe and Asia-Pac, there is not much room for market fragmentation in Brazil in the near future, given that the regulation by CVM in Brazil is more orthodox, with the exchange definitely playing a strong role in market development. In the meantime, brokers’ are motivated to in-house develop tools that will empower them to internally match natural liquidity, though they will still have to cross orders at the exchange. So, while there’s a growing interest in flow segmentation, it is probable that in Brazil, in contrast to foreign markets, brokers will develop internal tools that will help them segment, advertize and sell their liquidity by matching buyers and sellers in a scalable manner, but at least in the beginning, they need to start utilizing the established exchanges and not the private pools to cross its orders.
Due to the caliber of the infrastructure and its related gains, it is possible that in Brazil, the exchange, in conjunction with the largest brokers, will be responsible for the modernization of the market structure. But since in the U.S, new pools with segmented liquidity, are flourishing within venues that are being increasingly consolidated by the big players, it is possible that ultimately, the model adopted in Brazil will converge to the model present in other markets.
The Brazilian Electronic Landscape
