The Year of Sophisticated Trading and Regulatory Fallout

As we emerge from the cautious optimism of 2010 and enter 2011 feeling slightly more positive, several trends have already emerged as top issues for our industry. It is clear that regulatory reform will continue to have a big impact on the industry in 2011, as rule-makers begin to draft and implement the legislation signed into law last year. No less important are the growth of Brazil as a key new market and the drive to use sophisticated trading technologies to generate alpha from new sources and cross-border arbitrage.

Regulatory Limbo

Clearly, regulatory reform will have a big impact on the overall market this year. There will be much uncertainty over the final rules and how they will affect the technology decisions at financial organizations. To complicate matters further, various global regulators are looking to pass their own versions of regulation, which will force firms operating internationally to comply with a multitude of local laws, increasing the chance for regulatory arbitrage.

We have seen the industry take a wait-and-see approach to regulation last year and going into 2011. Most are reluctant to invest in new technology only to find out that it won't be enough to meet the new standards. Many firms are making a "buy versus build" decision of their trading systems, especially where it concerns connectivity to international markets where the firms expertise may be weaker, for this exact reason. They would rather let someone else manage the regulatory nuances of local markets, freeing them up to focus on their core competency of developing and executing successful trading strategies.

Cross-Border Profits

As financial firms struggle for alpha, they're looking for new and innovative trading strategies to generate greater returns and beat their competition. Recently, we have seen a surge in cross-border trading, particularly between the US and Canada, Brazil, and Asia, and this trend will continue in 2011. Traders are looking to take advantage of cross-border arbitrage, developing unique and sophisticated trading strategies. As our industry grows to be even more interconnected, such cross-border trading strategies are becoming more accessible to different firms. We are seeing smaller trading shops employ this strategy to beat competition and generate alpha.

Brazil on Top

In step with the cross-border trading trend, Brazil will emerge as one of the hot markets for 2011. Although there has been a lot of interest in the Latin American region over the last few years, Brazil is ripe for an explosion of sophisticated high-frequency trading. However, whether this growth takes place in 2011 or even further out in 2012 or 2013, still remains to be seen as the market continues to develop.

With the CME Group's investment in BM&FBovespa and the government's focus on creating regulations that support and foster the growth of a strong local institutional trading market, we believe that the infrastructure is poised to encourage strong growth in Brazil in the years ahead. In fact, we are starting to see a demand from local traders for technology and trading systems that are tailored to their market. Although there is increasing interest from US and European firms to trade on the BM&FBovespa, the interesting trend is the growth of sophistication among the local trading community.

There is no doubt there are still challenges ahead, but there are also hints of optimism popping up all around. Firms will need to stay focused on maintaining the efficiencies it achieved over the last couple of years but they also need to keep an eye out for the great opportunities waiting just around the next bend.

Marty Leamy is president of Orc Americas, a financial services solution provider.