Brazil: Who will be joining the carnival?

May 23, 2013 Leave a comment

Brazil: Who will be joining the carnival?

http://www.automatedtrader.net/articles/algotraveller/142730/brazil-who-will-be-joining-the-carnival

First Published in Automated Trader Magazine Issue 29 Q2 2013 : Algotraveller

The Olympics, the World Cup, new trading platforms… It’s all happening in Brazil these days. The country’s exchange, BM&FBovespa, is going full steam ahead with trading and execution system upgrades while also trying to lower fees and overhaul post trade services. But even as expectations for increased investment remain high, there are plenty of obstacles. International players have to contend with relatively high trading costs and big uncertainties over taxation. Anna Reitman reports on the emerging picture for automated trading.

In terms of performance, quant funds in Brazil have a nice story to tell, says Mauricio Bicalho, partner at fund manager Triscorp Investimentos. But the story is also a relatively new one, and the trading environment in 2012 meant that the few local quant funds around are experiencing their first slump, he adds.

Mauricio Bicalho

Triscorp hires external managers in São Paulo, Rio de Janeiro, London and New York to run its quantitative and systematic strategies, which represent about 5% of its total allocation and include equity long/short, equity hedge and CTA/managed futures (trend following).

“In the US, most trading flow is done by quants one way or another. In Brazil, the vast majority of order flow has zero to do with quant trading,” he says. “You would assume there is more opportunity for arbitrage, but then there is a problem of market depth.”

Liquidity is another sticking point, and this is one of the reasons that BM&FBovespa (BVMF) is trying to attract high frequency and algorithmic trading. Though Bicalho recognises that there is a raging debate over HFT’s trading footprint in the US, he says that on average quant traders are viewed as a volatility shock absorber for the rest of the market.

From an exchange point of view, more volume means more profits and BVMF has overhauled its trading and execution systems to pave the way for electronic flow. These technological upgrades have been the high point of last year for Brazil’s brokers, says Amanda Altobello, head of electronic trading at Alpes CCTVM, an independent discount broker.

Alpes is one of the country’s top 15 brokers – top five in futures – and it transacts between 1.5 billion and 2 billion real (about $750 million-$1 billion) per month in equities and between 1.2 million and 1.6 million contracts a month in futures. In the past five years, Alpes has focused on electronic trading, with particular attention on HFT and market makers.

International clients tend to use their own algorithms, says Altobello, which can be accommodated, though Alpes also provides TWAP and VWAP. Based on some of the shifts she is seeing in the market, she expects to see more international clients coming on board by the end of the year, while existing clients are increasingly asking about equities.