There's a Ferrari in Mexico, But What About the Roads?

It's not enough to have a low-latency trading platform at the local exchange. If the bottlenecks leading to the exchange are still problematic, all the messaging capability in the world won't fix the situation.

So revealed some skeptical Mexican brokers at the recent Connect and Trade Mexico conference in New York. The event was a chance for the Bolsa Mexicana de Valores (BMV) to brag about its new matching engine, Monet, which debuted in September. Despite its exchange monopoly in the land of Carlos Slim, BMV's volumes have historically languished compared to its US counterparts to the north and its Latin American counterparts to the south. By upgrading its technology, it hopes to attract members of the algorithmic and high-frequency trading (HFT) communities.

Though the macroeconomic story in Mexico is encouraging, and he acknowledges the work that BMV has put in, Banco Bilbao Vizcaya Argentaria (BBVA) global head of electronic trading sales Simon Haque says demand to trade the market is still tepid. One of the reasons is poor connectivity between New York and Mexico City. "You've got a Ferrari engine, thanks to the matching engine, but you've got single-lane slow traffic going all the way from New York to Mexico,” he says. “There's no point in having a Ferrari engine if messages aren't arriving quick enough." NYSE, he says, is working on improving that connectivity.

Mauricio Trigueros, head of equity trading at broker Grupo Bursátil Mexicano (GBM), says patience is required to let the entire system adjust and settle. "It's always a learning curve when you put something new into an exchange. There were a couple of glitches in the beginning and there usually are. I've never seen one thing in IT that goes exactly as planned. There's no point in saying we are there already. You're never there technology-wise,” Trigueros says.

One of the early problems is on the broker side, where there is a disparity between those who have made the technology investment to access BMV's new capabilities and those who haven't. The exchange says it is handling millions of orders a day, where a few years ago that number was around 7,000. The additional market data has clogged the capacity of those brokers that have not upgraded their own messaging systems. Jorge Alegría, CEO of BMV's derivatives exchange MexDer, says all participating brokers have been given deadlines for improving their systems and leveling the playing field.

There's no point in having a Ferrari engine if messages aren't arriving quick enough. - Simon Haque, BBVA

Alegría cites a figure of 30 to 40 percent in volume growth since Monet came online. There was some debate about whether that growth was a result of recent initial public offerings (IPOs) or something more organic. Alice Botis, head of Latin American business development at Fidessa, says the technology has attracted more algorithmic flow specifically. Most high-frequency flow in Mexico comes from outside the country.

One option that all panelists say would not help the situation is adding another exchange. It would only create fragmentation while not adding liquidity, and would not reduce what is still a high price for co-location, which stems from electricity and infrastructure costs rather than exchange fees, they say.

The Bottom Line
Monet was a step in the right direction for BMV and investment in Mexico more broadly. The Mexican economy survived the financial crisis better than Europe and the US, and has shown promising growth in the years since. BMV needed to update its messaging capacity to take advantage of that promise and to avoid falling behind BM&FBovespa and Mercado Integrado Latinoamericano (Mila) in the battle for Latin American investment dollars.

Assuming the upgrade is successful in luring high-frequency traders, mostly from the US, regulator Comisión Nacional Bancaria y de Valores (CNBV) must keep the market stable, avoiding volatility and clamping down on abusive market practices often ascribed to HFT. As one worried attendee at Connect and Trade Mexico says, "If you bring the Ferraris to town, you have to hire more police."

Carlos Quevedo Lopez, vice president for securities market supervision at CNBV, says that although his organization has an online system to review trades, change is coming faster than they can handle. "We're working very hard with the exchange and the brokers to come up with a framework,” he says. “We have some pre-trade [risk requirement] proposals with the exchange right now, so we don't have to depend on the pre-trade proposals of the brokers. We can have both layers. We'll be spending a lot of time in the next year working on this framework that will ensure that something like the Flash Crash won't have consequences for anyone but the broker and its counterparties."