JLN web content editor Nicole V. Rohr talked to Alice Botis, Fidessa’s head of business development in Latin America; Hernan Arellano, partner and head of equities at Chilean broker IM Trust; and Felipe Gazitúa Undurraga, sales trader at IM Trust, about the recent partnership struck between the two companies in Chile. All three commented on the timeline for derivatives regulation, electronic trading and algorithms in the Andean region.
Q: What motivated the partnership between IM Trust and Fidessa?
Hernan: In Chile there are only [a few] providers already connected with the local stock exchange. One of them is Fidessa. We have been in the last year analyzing how we can grow and provide the best services in Chile to our clients, which have been growing mostly in foreign clients.
Most of our clients, which are brokers and asset managers, were asking us about connectivity, and ways of having direct market access (DMA) and executing algorithmic (algo) trading. So, we analyzed the case in Brazil and what happened [there], and essentially what we think is going to happen in Chile in the next five years. That is why we decided to make the first move, being the first broker in Chile offering this service.
Alice: I think what is very important is IM Trust’s growth plan over the next two years. They are very well established in Chile, [and] they are moving into Peru and Columbia.
Hernan: Our focus in Chile is on institutional clients and foreign clients. We have three divisions in Chile: a brokerage house, which has been recognized as No. 1 in fixed income in the last 10 years; equities, which has been growing in the last two years, and we have a corporate finance division; and asset management. In asset management, we are now managing $2 billion in the global market, so our focus is large clients and not many people. So, we are 160 people, just working in two floors in Santiago.
The idea is to replicate the same model in Peru. We have the research, we have the technology now, we have the knowledge, and since our focus is on institutional clients, we don’t need to hire too many people. We need to just focus on pension funds, mutual funds, and insurance funds. The companies and the foreign clients we already have in Chile are the same clients we’ll have in Peru. I just need to provide them with the same technology. We already have a very, very strong research department in Chile. So for me, starting to cover Peru and Colombia is pretty easy since I already have a research department with specialists in the industry.
Definitely, the market will grow. That’s going to happen here for sure, but the other thing that is important is that the local stock exchange in Chile provides people with the technology to trade. So, all of the brokers have the same system. In the end, the local market considers most of the brokers as commodities, you know. That’s why we wanted to have a different system and provide algo [trading] and everything the other brokers cannot provide. And to not be considered a commodity anymore.
Q: Can you explain what happened in Brazil, in regards to DMA and algo trading, and the steps it will take to move Chile in that direction?
Felipe: I think that the biggest regulatory change that should happen here and that would boost the markets would be derivatives regulation. We still don’t have formal regulation of derivatives, so the market hasn’t developed properly, and I think that that was a huge boost for the Brazilian markets.
Alice: You know, with the introduction of DMA directly to the market and algo trading, it just all starts to feed on itself. You start to get more volumes. People want to participate in a market with liquidity, so more people participate. You can see the growth of the Brazilian market over the last couple of years, [and] the volumes have just gone through the roof.
Felipe: There is no structural difference, or large structural difference, between Brazil and Chile that could support Chile diverging from what Brazil has done. [With] regulation and derivatives, and with the influence of the stock exchange to provide access for brokers to electronic trading and DMA, I figure we will continue in Brazil’s footsteps.
Q: How do regional stock exchanges work together in Latin America?
Felipe: Mercado Integrado Latinoamericano (MILA) hasn’t exploded yet. There are many, many tax issues. We still have differences in capital gains for most stocks among those three countries, so it gets a little confusing for some investors to use the market as a whole. I would say large institutional and foreign investors can view things in Latin America as separate markets because of these differences. I think MILA has stepped up a little bit in the last month. Obviously, electronic trading, DMA, [and] algo trading should help that. I’ve seen efforts from the Santiago stock exchange in that direction. I think the Colombian stock exchange is doing the same. And I think Peru was a little bit behind, but I think they are doing what they need to do to begin to build more flow and more liquidity into that market, too.
Alice: Mexico has just signed a letter of intent to join the MILA initiative, as well. The whole MILA inter-country routing is a huge initiative for the local markets, because currently the local pension funds rely on their local brokers, and they get local research. Therefore, they generally tend to stay investing in their country of origin. But with the MILA effort, firms like IM Trust are now expanding their research efforts. So, they’re going to start expanding their research to include Peru and Colombia. So, once the local pension funds, for example, in Chile are able to receive that information and start to understand what to invest in, it will encourage them to invest outside of their country and just increase the inter-country routing.
I think there are some regulatory hurdles [in Mexico]. My understanding is that Mexico today recognizes the Chilean rules and regulations, but it doesn’t yet recognize the Peruvian or Colombian rules and regulations. So, I think they’ve got some regulatory review to do before they can officially join, but I understand that’s underway at this time.
Q: What is competition like in Latin America?
Felipe: Here in Chile at least, you have 20 to 30 brokers, but the actual competition is between… three large local firms, and also there are a couple of international firms already in the country. So, competition is tough.
What we are trying to do with the union with Fidessa, obviously, is to take the standards of execution to the levels that our clients are used to. We can provide research, we can provide execution, but obviously electronic trading and text messaging is something probably all over the world clients have been used to for more than 10, more than 20 years.
Alice: I think that what you’re seeing in the whole of Latin America is this extension of what’s happened in other parts of the world. The exchanges are doing their part right now to upgrade themselves… Now it’s up to the brokers to do their part. Firms like IM Trust and many others are trying to [invest in] their in-house technology to take advantage of the changes that the exchanges have done. Then there’s this national promotion of investment from the retail and the local brokers, and then going out and marketing themselves in the international market. I think, as a whole, there’s a very positive [trajectory] over the next few years [in terms of] growth.