"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Wednesday, November 16, 2011

Like Cancer, HFT Finds A New Host Daily

From WSJ:
Brazil's main financial exchange operator is trying to lure more high-frequency traders, with a raft of technology upgrades aimed at a segment that has already doubled in size since the start of the year. 

BM&FBovespa SA (BVMF3.BR) has begun installing a new trading platform offering faster transaction times as well as a new data center facility to house its electronic systems. A new connection offering quicker trading times between New York and the exchange group's home base of Sao Paulo opened in October. 

The boom in high-frequency trading has boosted volume on many U.S. and European exchanges, though it also attracted criticism from some lawmakers who blame practitioners for heightened market volatility, a charge many in the industry contest. 

"It's very difficult to forecast how that [high-frequency trading] could grow in the future, but looking at other countries, we can see there's room for expansion," said Andre Demarco, operations director at BM&FBovespa, in an interview. 

High-frequency traders use automated strategies to rapidly transact in and out of securities and derivatives contracts, often scanning multiple markets for signals to pursue a trade. On electronic markets, such firms' role is similar to that of a floor trader, taking the other side of transactions issued by individual investors and financial institutions. In the U.S., the business is seen driving about 53% of daily stock trading, according to estimates by the research firm Tabb Group. 

As of October, BM&F Bovespa estimated that high-frequency traders made up 8.3% of trading in Brazilian derivatives contracts, up from 3.5% in January. High-speed dealing in shares has risen to 10.3% from 5.7% in January. 

Such firms' stature is seen more than doubling again in the years ahead as the exchange group rolls out a new trading system, called Puma, and constructs a new Sao Paul-based data center that will house exchange engines for matching up transactions as well as the tools of electronic trading firms. 

"I strongly believe we will be shooting to 25% or 30% of the market by mid-2013," said Nilson Monteiro, head of high-volume direct market access for Link Investimentos, which began building out access services for computer-powered traders in 2008 and estimates that it now handles 80% of Brazil's high-frequency trading business. 

BM&F Bovespa is cultivating electronic trade in partnership with Chicago-based futures exchange operator CME Group Inc. (CME), which last year activated its own new data center designed to house higher-speed systems. CME and BM&F Bovespa have collaborated on development of the Puma platform, which went live in Brazil at the end of August. Currencies and derivatives on commodities and interest rates were first to migrate onto the faster platform, with stocks and bonds slated to move over in the coming year. 

The data center facility now under construction in Brazil mirrors recent efforts by CME and NYSE Euronext (NYX), and will sell space and services to electronic traders and other companies that connect brokers and investors to BM&F Bovespa's markets. 

One of the U.S.-based electronic trading firms to recently set up shop in Brazil is Virtu Financial, which already maintains a major presence on U.S. markets like CME's futures exchanges. "We took a great deal of comfort in the fact that CME had this global partnership with the BM&F," said Douglas Cifu, president and chief operating officer of Virtu, speaking at an investor event in Chicago last month.
Network pathways connecting Brazil to other financial hubs are also being beefed up, making it easier for trading firms that buy and sell in many markets to integrate Brazil into their strategies. CFN Services in October opened up a fiber connection between New York and Sao Paulo that transmits data in 109 milliseconds, a service aimed at high-speed trading firms. One millisecond is one one-thousandth of a second. 

"Typically you're making trading decisions based on information that you get from other places in the world, so you need that connectivity," said Mark Casey, president of CFN, which hooked up some of its first high-frequency trading clients to Brazil in 2010. "You're going to see a growing pickup here." 

BM&F Bovespa, already one of the world's biggest exchange companies by market capitalization, would see a substantial boost in business from growth in rapid trading strategies, which are the biggest generators of exchange fees in more-developed markets like the U.S. 

The evolution toward more electronic trade could bring new challenges, however. High-frequency strategies are closely guarded by their users and little understood by individual investors and more-traditional asset managers, prompting some institutions to direct their trading away from exchanges and toward private venues to avoid being outpaced in the market by faster-moving firms

Such firms in other markets have also supported competing exchanges, which have driven down trading fees and opened up new strategies. U.S.-based BATS Global Markets this year partnered with Brazilian investment manager Claritas to explore the development of a competitor to BM&F Bovespa. 

A tough road is seen for any rivals, however, as BM&F Bovespa controls much of the infrastructure underpinning financial trade in Brazil. The company, for instance, will not allow competing exchanges to use its clearinghouse, chief executive Edemir Pinto told the Financial Times in an interview. 

Representatives of BATS had no immediate comment.