Q&A: Tapping Alpha in Chile, Columbia and Peru

When it comes to South America, who is the next Brazil? SunGard has spent the last 11-plus years dealing in Brazil and has established a gateway to Chile with plans to do the same in Peru and Columbia. SST sits down with Laurence Latimer, senior vice president and managing director of trading and client connectivity in the Americas for SunGard, to discuss the possibilities in South America. Although the press mostly discusses Brazil, Latimer says there is a real opportunity for traders to find alpha outside of São Paulo—specifically in Chile, Columbia and Peru.

How do countries like Chile, Columbia and Peru compare to Brazil?

Laurence Latimer, SunGard: If you look at the gross domestic product (GDP) in Latin America, clearly Brazil is the 800-pound gorilla. Depending on the year, Brazil represents close to 40 percent of Latin America's GDP, followed by Mexico, which represent around 28 to 30 percent. Chile, Columbia and Peru together make up about 15 percent of GDP in Latin America. There is a reason why Brazil is top of everyone's mind: It is simply because of its sheer size.

But with markets like Columbia, Chile and Peru, people fail to recognize that these economies have been investment-grade for years now. The exchanges there, and in particular in Chile, are making significant investments and are moving toward a purely electronic marketplace or, at a minimum, have electronic markets alongside open-outcry markets that are competitive from a latency perspective.

How does the regulatory environment in those nations compare to Brazil?

Latimer: You are seeing a much better legal and regulatory environment. Fifteen years ago, if you watched the documentary "The Two Escobars,” for example, Columbia was not a fun place to be, from a business perspective, and Peru sits on the border. The rule of law was still developing, but that has greatly improved in recent years.

Their regulatory frameworks are now moving toward international standards, where there is much freer in-and-out flow of capital, and firms can repatriate profits without being overly taxed, so they have made themselves very welcoming places for the types of business investment that is required to sustain growth.

Why is this region enticing for traders?

Latimer: While traders are still looking for more liquidity, for someone looking for alpha, these are the places where you find spreads and commissions that you just don’t find in other places, and enough depth to play in those markets.

From a technology perspective, how far behind Brazil’s largest exchange, BM&FBovespa, are these exchanges?

Latimer: Santiago is making huge investments in technology. They had seconds of latency just eight months ago on their trading systems, and the amount of throughput they could handle was low. They have grown their capacity, and the internal latency of their matching engine is down from seconds to milliseconds. Similar investments are being made in Columbia and Peru.

We are also seeing them work together to create scale across their exchanges so that they can compete with larger exchanges. For instance, one proposal on the table is to create a pan-Northern Latin America exchange, where if I trade in Peru, I can see the bid–offer spreads in Columbia and Chile, and trade against as if I was trading locally.

If you can put together the liquidity you have in Columbia, Chile and Peru from their equity exchanges, it becomes a much more enticing play and it makes it easier for international firms to come in and want to be there.

BM&FBovespa is hyper-aggressive in making sure that its fundamental infrastructure—the trading tools it uses to match and route order information and market data—is state-of-the-art. You are starting to see that kind of aggressiveness in Columbia, Chile and Peru; they are starting a little further back and they have a smaller market with which to work, but there is an increasing appetite and commitment to have world-class systems.

Do you think a major North American exchange will make an investment in these South American exchanges, the way the Chicago Mercantile Exchange (CME) did with BM&FBovespa?

Latimer: I don't have a crystal ball. But if I were running an exchange, and given that there is certainly the trend of consolidation globally, once you get past the top 10 to 20 markets, what is next? Once you go past São Paulo, then the Santiagos, Limas and Bogotás start looking really good, especially as a regional play.