Opening Cross: Don’t Call Me ‘Emerging’

Brazil—where industry association FISD held an event last week—has attracted a lot of interest in recent years, along with other so-called “emerging” markets, for its ability to deliver attractive returns on investment while more mature markets languished in the deepest financial crisis in many years. But set foot in the country and you’ll immediately see that Brazil “emerged” some time ago, and is better described as a “growth” market.

Perhaps one reason Brazil has been able to outstrip more mature capital markets—aside from its own crisis—is that the regulators had already developed strict rules designed to maintain efficient and stable capital markets. Recent taxes on foreign funds may not have entirely dimmed the flame of international investment, but other measures have played their part in protecting the markets and investors alike.

For example, local exchange BM&F Bovespa has operated circuit breakers for years, and though the exchange offers four classes of direct market access, naked access is not allowed, and trades must be executed via brokers—if not actually over their infrastructure, then with strict risk and permissioning controls assigned for each client.

Another feature of the market is that you can see who you’re trading with—not down to the individual account level, but at least to the level of the executing broker, bringing even more transparency to an already centrally matched and cleared market. The exchange also publishes lists of the brokers who trade the most volume in a particular stock, which encourages brokers to compete for a place on that list, in the hope that pension funds will flock to those with better rankings. And for those who don’t want to make their strategy public to the market at large, the exchange is planning to launch a dark pool that will trade BM&F Bovespa-listed stocks

One contradiction to this orderly façade is infrastructure. A panelist at last week’s event compared the levels of sophistication in trading technology to general infrastructure as “driving a Ferrari on a dirt road.” For example, during rush hour, everyone appears to drive their cars out of the parking lots onto the streets and just sit there honking but barely moving. Without a public transportation system sufficient to meet the needs of a sprawling city that is home to some 19 million people, cars are the primary means of transport, and there simply isn’t enough space for all of them at once.

BM&F Bovespa has experienced a similar issue: The introduction of co-location in 2009 caused a major hike in data traffic as high-frequency traders began bombarding its trading engine with orders. But instead of continuing to widen the road by increasing bandwidth, the exchange is attempting the equivalent of reducing the number of vehicles by developing a conflated feed that cuts down the number of messages per second distributed to firms that don’t need low-latency, high-frequency information, who were overwhelmed with bandwidth-consuming feeds.

But all too soon, my time here is at an end. So, thanks again to FISD and our Brazilian hosts, to the market professionals who gave up their time to share their knowledge, and to the nice folks at Tullett Prebon for introducing me to Brazilian churrascaria. And perhaps it’s time to set aside “emerging” designations or terms like BRIC that lump countries together—though with China accounting for 15 percent of Brazilian exports, there is certainly a degree of inter-dependence—or at least, better classify the designations to reflect other factors such as income distribution, education levels, and inflation. But ultimately, all these factors are data of one sort or another, and hopefully this data will continue to drive growth and allow us to return to assess Brazil’s emergence again next year.