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03:42 PM
George Kledaras
George Kledaras
Connect Directly

Down Mexico Way

Market structure in Mexico leads the way for Latin American electronic trading with some serious new infrastructure and support for local institutional trading and north to south flow from statistical arbitrage.

Last week there was an excellent presentation and panel discussion at the Plaza Hotel in New York by the Bolsa Mexicana de Valores (BMV) conference to promote the growth of the capital markets in Mexico. This is the third annual Connect and Trade Mexico conference that I've attended and I am always impressed by the consistency of the message that I heard last week here in New York and during my frequent trips to Latin America over the last few years.

The BMV released a new matching engine called MoNeT in the fall of 2012 but has yet to unleash its full potential. The new matching engine was designed with Carnegie Mellon University and clocks in at 90 microseconds for a round trip match. This makes it among the most technologically capable exchanges in the world. The BMV will be working closely with the local brokers in order to responsibly roll out the new functionality by following a strict time table.

Jorge Alegria, SVP of Market Operations at BMV and CEO of MexDer made some interesting comments that apply to the other Latin American exchanges in Chile, Colombia and Peru especially. The BMV made the investments into their new exchange not to attract HFT but to handle algorithmic trading for institutions, making it easier to access the markets for trading among the major OMS.

The BMV also introduced a mid point match for institutions called Mid-Mex as their first dark pool offering. It's easy for the local institutions to understand accepting the midpoint between the lit order book's bid and ask price. Any informed order flow from institutions certainly helps the HFTs.

The BMV allows co-location but still makes the brokers accept the responsibility of the last touch to the exchange. So pre-trade risk controls are set by brokers and client details are kept away from the exchange. Trust is especially important cultural part of trading in Mexico and Latin America.

International Buy-In
The largest local brokers are buying up brokers in Brazil, Chile and Colombia so that they can become regional players. Clients will demand the same levels of service from those markets too and the Mexicans are not going to shy away from technological barriers.

Some issues that still hold Mexico back are:

1) Connectivity: Connectivity to the exchange from New York is very slow and not reliable;

2) Liquidity: The lack of research, liquidity, and healthy price earning ratios for issues except for the largest names and;

3) Lending: Securities lending is not allowed in Mexico.

But these are all being worked on and will impact the market as the investments are made and rules are changed. Mexico has been very good at looking up the answers in the back of the book, leveraging USA, German and Canadian market structure. New order types like hidden order or pegged orders are ready to go as soon as the market is ready for them.

MoNeT's Artwork
There is hard proof of MoNeT's success. Since last fall, the BMV volume increased 30% to 40%, reports MexDer's Alegria, and not only trade volume but also the number of orders and messages per second. This was directly related to the technology and some large IPOs.

Trading is pretty efficient in Mexico and while there is only one exchange, there is competition -- around 30% of the volume of the BMV is attributed to ADRs traded in New York, something that is not unnoticed by the local brokers in Mexico.

So while the North American traders look around the world for new places to trade, as long as historical price data used for back testing algorithms are sourced and faster lines are set up, Mexico is going to be a friendlier place to trade.

George Kledaras is the founder and Chairman of FIX Flyer, a financial technology company in New York City. He is also the author of numerous articles about the FIX protocol and electronic trading standards, and a frequent speaker on the major technology issues of our ... View Full Bio
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