Direct Edge Offers Advice to Brazil's CVM on Launching Competitive Exchanges

Electronic stock exchange operator Direct Edge sent a letter to Brazilian regulators offering advice and analysis on opening their market to competition between trading platforms.

The 21-page letter was written in response to Brazil’s regulator Comissao de Valores Mobiliiarios’s (CVM’s) request for comments, suggestions and opinions regarding the transition to allowing competition between multiple trading platforms.

In November 2011, New –Jersey-based Direct Edge announced plans to open a Direct Edge Brazil, a new exchange in Brazil to compete with the BM&F Bovespa, the dominant market in Brazil’s stock trading.

“As the one of the world’s largest operators cash equities exchanges, and as a potential new exchange entrant into the Brazilian equity market, we believe we have a unique perspective that we hope will inform CVM as it considers the important issues laid out in the consultation,” wrote William O’Brien, CEO of Direct Edge in the letter to CVM.

In addition, BATS Global Markets and a local asset management firm Claritas announced plans to open an exchange in Brazil. This past June, NYSE Euronext and ATG took steps to launch Americas Trading System Brasil (ATS Brasil), a new alternative-trading venue. Pending CVM approval, it plans to operate in 2014.

The CVM’s request for consultation instructed respondents to specifically address the challenges of ensuring best execution, market data distribution and self-regulation in a market with multiple exchange participants.

In his letter, O’Brien offers analysis and historical examples of how different capital markets paved the way for a more competitive trading between different platforms.

Drawing on examples from the US market structure to ensure best execution with Reg NMS and it trade-through rule, O’Brien analyzes the rules-based approach which required all the exchanges to connect with each other, versus a more flexible principle-based approach selected by Europe with MiFID and Australia which saw Chi-X Australia enter as the first outside ATS to compete with the Australian Stock Exchange. “The regulatory path each market has followed is based on a unique combination of its history, existing infrastructure, pre-existing level of market fragmentation and other factors,” stated O’Brien.

O’Brien advised Brazil’s CVN to take a principle-based approach and to move slowly.

Once regulators allow new electronic trading platforms to operate and compete with the BM&F Bovespa, the market could see trading volume disperse across multiple platforms.

New entrants like Direct Edge and BATS are vying for a share of the Brazilian algo trading market, which already includes — locals — Brazilian institutions as well as hedge funds and sophisticated broker-dealers - and European and U.S. traders “Electronic trading and connectivity is already well established in Brazil, with brokers using elite technology and utilizing internationally accepted common messaging protocols such as FIX to standardize communication. Sophisticated direct market access (DMA), algorithmic trading, co-location, and order management systems are also widely used,” stated O’Brien in his letter.

Given the absence of competition in Brazil currently, the only technology infrastructure not generally in use relate to the means of accessing liquidity from multiple venues simultaneously – smart order routing technology. O’Brien pointed out that there will be cost-effective ways for brokers in Brazil to access smart order routing. Connectivity providers such as Bloomberg, Thomson Reuters, Fidessa, and Sungard, all leveraged their expertise in the US to extend services to Europe, Canada, and Australia as those markets opened to competition, he noted in his submission.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio