Max Bowie: Banking on Brazil

It took Hollywood almost three years to release Too Big to Fail, about the beginnings of the credit crunch—as long as it has taken for western markets to return to some degree of normalcy. The Dow Jones Industrial Average’s recovery from 6,626.94 points on March 6, 2009 to 12,512.04 points at close on May 20 this year would be considered spectacular in any other circumstances. But in the meantime, the impatient capital markets have been seeking other investments elsewhere.

This quest for exposure to higher-return markets has led traders and investors to Asia-Pacific and Latin America—particularly its largest market, Brazil. Both regions have demonstrated strong and continued growth, while other economies have floundered, institutions failed and sovereign debt has faced default. They also had little exposure to the toxic assets that precipitated the credit crunch and financial crisis, and have yet to succumb to the craze of market consolidation sweeping more developed and fragmented markets, with a few exceptions, such as when Bovespa, the Sao Paulo Stock Exchange, merged with derivatives market the Brazilian Mercantile and Futures Exchange (BM&F) in 2008, and the current multinational exchange Mercado Integrado LatininoAmericano (Mila) being created by the Bogota, Lima and Santiago stock exchanges. In fact, the Australian government recently blocked the proposed merger between the Australian Securities Exchange and the Singapore Exchange.

However, while Asia’s key financial markets are among the oldest in the world and are mature in terms of trading technology and market data—with some markets such as the Tokyo Stock Exchange and Singapore Exchange renewing their infrastructures to support the latest low-latency and co-location-based trading strategies—Latin America is still considered a collection of emerging markets. As its largest economy, Brazil may be able to claim fully “emerged” status, with mature markets and a regulatory regime that, for example, allows several forms of direct market access (DMA) but never naked access, and provides transparency around who submits quotes and orders to market.

Stable and Attractive
This frustrates some market participants, but has helped ensure the stability that now makes Brazil an attractive investment—and not only to investors seeking to ride its growth wave: Data providers also sense opportunity to capitalize on the region’s growth by positioning themselves as the providers of choice for next-generation of high-frequency trading technologies, leveraging their experience from the US and Europe, while also seeking to safeguard themselves against lackluster returns from their home markets. Vendors like Thomson Reuters, Bloomberg and Dow Jones have established presences in the region, stemming from their news bureaus, while other vendors like Fidessa and Activ Financial have already built feed handlers and connectivity to local markets. New entrants such as Sterling Trader and SpryWare are looking to sell directly to local market participants, just as Progress Apama and StreamBase Systems experienced success in recent years selling complex-event processing software to banks and hedge funds to support the evolution of high-frequency trading strategies.

But vendors looking to capitalize on Brazil’s growth face another challenge: local, already established providers—such as Agencia Estado and Valor Online. Foreign vendors may get their foot in the door in those areas where Brazil falls short of more mature markets: physical and technical infrastructure—one industry participant described using the latest technologies as “driving a Ferrari on a dirt road”—or in new technologies such as machine-readable news (to read about Itau-Unibanco’s assessment of elementized news, see the May 23 edition of Inside Market Data). Local vendors have largely yet to provide data to clients beyond their local market, which is another area where outside vendors can provide value, but these international interlopers will need to bring something new and valuable to the game if they are going to be able to bank on Brazil.