November 21, 2011 11:31 am
Direct Edge plans Brazilian launch
Direct Edge, the fourth-largest US stock exchange operator, is to launch an electronic equities trading platform in Brazil in competition with BM&F Bovespa, the domestic monopoly.
The US group intends to launch the venue in Rio de Janeiro in the fourth quarter of 2012, pending approval from Brazilian regulators.
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The company’s decision to pick Rio as its base is likely to win them support from the government, which has been investing heavily in the city’s revival as it prepares to host the Olympic Games in 2016.
Over the past decade, Rio has gradually lost businesses to São Paulo, which is generally favoured by executives for its better transport links and is seen as a safer place to live.
The move is a sign that the competitive forces that sparked fragmentation of equities trading in the US and Europe have arrived in Brazil, where share trading is dominated by Bovespa. The same trend is playing out in Asia, where Chi-X last month became the first alternative trading platform to challenge ASX, the incumbent in Australia.
It is also a sign that Brazil has become one of the most attractive prospects for investment in market structures such as exchanges and downstream post-trade services.
BATS Global Markets, the third-largest US equities exchange, also has designsto enter the Brazilian market while IntercontinentalExchange, the US futures and commodities exchange, bought a 12.5 per cent stake in Cetip, the post-trade services group, for $512m in July.
The Direct Edge move represents another challenge to BM&F Bovespa, the world’s third largest exchanges operator by market value as a listed company. While it has a domestic monopoly, the Brazilian exchange has aimed to pre-empt potential competition by attracting high-frequency traders to its platforms to raise volumes and increase liquidity in shares.
“The Brazilian economy is among the fastest growing in the world and we believe that a second stock exchange in the country will spur even greater investor participation through competition that drives innovation and price improvement,” said William O’Brien, chief executive of Direct Edge.
He said Direct Edge had been researching entry into Brazil for a year and a half. Asked how much cheaper any Direct Edge platform would offer trading in Brazilian blue chips, he told FT Trading Room: “There is a significant difference in exchange fees compared to other developed markets. We do think there is value to be provided there. The gap is pretty wide.”
However new market entrants into Brazil would still have to find a way to clear trades. Last week BM&F Bovespa, Brazil’s national exchange operator, made clear that it would not share its vital clearing service with newcomers. BATS is exploring setting up its own clearing and depository services in a venture with Claritas, a Brazilian asset manager.
Setting up rival clearing services could also prove problematic, analysts said, given the complex nature of the Brazilian system whereby all trades are cleared at the final beneficiary level.
Mr O’Brien said Direct Edge had spoken to Bovespa about using its clearing house but declined to elaborate.
“Wherever we possibly can we are interested in reducing risks that exchange competition could introduce for the system if not introduced properly and clearing is a big part of that,” Mr O’Brien said.
Direct Edge Brazil will operate as an independent local company, majority owned by Direct Edge with its headquarters in Rio de Janeiro. A locally-based chief executive will be expected to maintain close working relationships with the Brazilian financial community, many of whom are based in São Paulo.
“The arrival of Direct Edge is further proof of the importance of Rio to the global financial markets,” said Eduardo Paes, the city’s mayor. “Having one of the largest stock exchanges in the United States operating here will provide added incentive for other global financial market participants and will likely attract broker services and financial technology firms.”
Direct Edge is owned by a consortium that includes the International Securities Exchange, investment banks JPMorgan and Goldman Sachs as well as brokers Knight Capital Group and Citadel Derivatives Group.
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