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Trading Mexico in 2017
Mexico faces headwinds this year from three fronts—local politics, the economy and international trade. Access to the equity markets via the national exchange Bolsa de Valores, more commonly known as the BMV, is no exception.
While the economy and international trade are being affected by a new U.S. administration led by Donald Trump, the BMV’s issues lie within its own infrastructure. Delayed market data or bandwidth during rebalances forced the BMV to close its doors to investors four times in 2016 while it dealt with the outages. This has highlighted the need for a new exchange for competition.
With the backing of local regulators, Bolsa Institutional de Valores, or BIVA, is awaiting approval to provide local and international investors an alternative place to trade. If it succeeds, BIVA will be the first competing exchange for LatAm markets. BIVA’s plans hinge on a concession approval from the Ministry of Finance, expected this month. At that point, BIVA would have six months to be in production. It anticipates the launch in the 3Q17.
Best ex
The National Securities and Banking Comission (CNBV) seeks to publish new regulations to ensure best execution for investors, and establishment of a new exchange requires consistency between venues. Upon BIVA’s launch, companies will trade on both exchanges and clearing and settlement will continue to be through the Contraparte Central de Valores (CVV).
“Rate is always a factor but better infrastructure holds more value for us.”—Rodrigo Velasco, BIVA director of operations
CENCOR
BIVA is backed by Central de Corretajes, called CENCOR, a conglomerate of companies that have been delivering infrastructure for financial markets for 25 years. The companies include Enlace, an interdealer broker; PiP, a fair-value market data provider; and MEI, an institutional securities lending platform.
BIVA has also recently raised 450 million pesos from four pension funds and believes that backing from the local institutional client base demonstrates investors’ appetite for an additional, competitive venue.
Skeptics question whether a new exchange is warranted, given that 12 securities were responsible for trading more than 50% of 2016 volumes in Mexico. BIVA counters that its value resides in technology and consistency over rate. Market structure professionals and traders are aware that competitiveness for execution venues resides in aggressive pricing. BIVA stated that its alliance with Nasdaq X-Stream technology, improved market data and lower latency will drive its success. “Rate is always a factor but better infrastructure holds more value for us,” said Rodrigo Velasco, director of operations at BIVA. “Fragmented markets, algorithmic trading and low latency solutions are what foreign investors are familiar with across the globe. We look to provide the best in technology to allow them to have a similar experience in Mexico.” This view has been supported by several quantitative managers who have kept Mexico at arm’s length for investment until its infrastructure was on par with other electronic markets. The progress BIVA has made and the technology being implemented have these managers considering Mexico for quantitative investment in 2017.
Improving performance with technology
BIVA regards its advantage as stemming from its simplicity and transparency. Part of the problem is market depth currently available to clients. Market depth on the BMV extends 10 levels, which in most markets may provide for price discovery and liquidity. But in Mexico, sweeping the book does little to find depth in real dollar terms. BIVA plans to display a full depth of book for price discovery to investors. When measuring latency and given its robust infrastructure, BIVA asserts that routing orders will be 10-20 times faster than BMV.
Market on close
Another differentiating approach from the current exchange is pricing of the daily close. BIVA looks to provide a closing auction, as opposed to the current 20-minute VWAP session that determines Mexico’s current closing price. It also seeks to display a closing imbalance feed to all investors that now is solely available to local casas de bolsas.
MOC pricing has always been important to indexers and a liquidity event for many investors, especially when it can amount to 10%-15% ADV in certain emerging markets, including Mexico.
ITG has been astute about the evolving market structure within Mexico and will seek to offer smart order routing between BIVA and BMV and enhance its existing Market Close strategy to include BIVA auction functionality.
Although Mexico has its share of problems coming this year, ITG and BIVA seek to be part of its solution via technology for investors.
