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Brazil in 2013: Where There’s Smoke, There’s Fire

The country of Brazil derives its name from the Portuguese word for the trees that once grew up and down its coast. In the 16th century, the timber from these trees was the first main export to Europe from what was then known as Terra da Santa Cruz (“The Land of the Holy Cross”). The wood from these trees produced a deep red dye, resulting in a name derived from the Latin word “brasa”, meaning “ember”. Over time, European merchants began to use the colloquial term for the county and its most valuable commodity: “Brasil” or “red like an ember”.

Red like an ember is a good way to describe Brazil’s economy these days. As one of the world’s fastest growing economies in 2010, the Brazilian economy was white-hot. In 2011 and 2012 though, the economy slowed to a low simmer as growth slowed substantially. In 2012, the stimulative policy changes put in place by the Brazilian government and central bank resulted in a record volume year at BM&FBOVESPA, as well as a number of compelling trading and investment opportunities.

Big Year for BM&FBOVESPA

November 25, 2012 marked the one-year anniversary of TT providing native market access to BM&FBOVESPA, which coincided with the exchange’s migration of the last of their futures products to the new PUMA matching engine. While the last year has been a challenging one for the Brazilian economy in general, the country is still expected to set the pace for growth in Latin America going forward. At the same time, the exchange continues to focus on product innovation and expanding their offering for both local and foreign investors.

In a year that saw volumes declining at most major futures exchanges around the world, BM&FBOVESPA’s volumes are actually up. Through the first nine months of the year, the exchange’s futures volumes were up 5% over the same period a year earlier. The increase in volume can be traced back to two things: uncertainty in the Brazilian interest rate markets, and BM&FBOVESPA’s technology and product launch initiatives.

On the technology front, the PUMA matching engine, developed jointly with the CME Group, was built with high-frequency traders in mind. It shaved the time the matching engine takes to process a trade from 10 milliseconds to less than one. In 2013, BM&FBOVESPA will move their equities onto this platform as well.

Product-wise, this past summer, the exchange listed eight new FX contracts, including mini-dollar and mini-euro products. In June, the exchange also began cross-listing contracts with the CME Group, launching a mini-soybean product that settles to the price of the same product on the CBOT. And in October, BM&FBOVESPA similarly launched a product based on the CME’s S&P 500 future. As these markets develop in Brazil, they may offer interesting spreading opportunities against similar products in Chicago.

“North-to-South” Access

While it is still a somewhat cumbersome process for foreign investors to trade on BM&FBOVESPA, even here, both the exchange and the Brazilian government are slowly greasing the wheels. Trading by foreign participants is expected to comprise 25% of total volume this year, versus 16% in 2011.

Connectivity into São Paulo has long been costly, but slowly prices are starting to come down as more and more “north-to-south” customers enter the market. Increasingly, extranet and hosting providers, such as TTNET, are setting up shop in Brazil, making it easier and more cost-effective for the global community to access Brazil.

The Brazilian government is doing its part as well to entice foreign capital. Long fearful of inflation, Brasília put in place capital controls, such as the 6% IOF tax on inflows of foreign capital for the trading purposes, to tamp down appreciation of the Brazilian real (R$) against the U.S. dollar. As fears of a strengthening real turn into fears of a weakening currency, the government is slowly eliminating some of these controls. Last December, the IOF tax on equities trading by foreign participants was dropped, and in early December, the number of foreign loans to Brazilian firms subject to the IOF tax was reduced. While the 6% tax on foreign capital inflows related to some derivatives trading remains in place, the government will likely look to remove that, too, as long as the real continues to look weak.

Information regarding how foreign investors can access BM&FBOVESPA is available on the exchange’s website here.

Looking Ahead to 2013

Somewhat turbulent economic times in Brazil have also played a part in the uptick in the exchange’s volume in 2012. In years past, with the Brazilian benchmark Selic interest rates hovering between 10% and 20%, the carry trade has been a popular one on BM&FBOVESPA.

That has changed somewhat in the last year, though. The Brazilian economy, which grew at a 7.5% clip in 2010, will slow to about 1.5% this year. Not bad when you compare it to Japan, the U.S. and Europe, but meager by BRIC standards. In an effort to get the economy back on track, the Banco Central do Brasil has cut interest rates from 12.5% in mid-2011 to just 7.25% as of October. It was the resulting uncertainty and volatility in the interest-rate markets that led the exchange to a record volume month in May of 2012.

Low interest rates coupled with low inflation (for now) offer a number of interesting trading opportunities going forward. For local Brazilians, they can no longer ensure themselves a healthy rate of return just by sticking their cash in a savings account. For the first time in a long time, Brazilians are looking to invest in their country’s stock market. As the CEO of BM&FBOVESPA, Edemir Pinto, told the Financial Times, “For any stock exchange, high interest rates are the biggest competitor you can have so this is a big moment of great transformation for the Brazilian market.” Traders who want to gain exposure to Brazilian equities can do so via the Ibovespa index futures on BM&FBOVESPA, which track the total return of the most liquid stocks on the Brazilian stock market.

Further Selic movements by the central bank also offer opportunities for traders looking to trade the DI interest rate swap curve. With an election looming in October of 2014, President Dilma Rousseff’s government will look to get GDP growth back on track. Earlier this year, she announced a stimulus plan consisting of 955 billion reais worth of infrastructure projects. These projects, coupled with other construction related to the 2014 World Cup and the 2016 Olympics, will lead to the issuance of debt that will likely have to be hedged in the futures market.

Still, that stimulus package might not be enough. Economists had projected GDP growth north of 4% in 2013, but lately they have been revising those forecasts downwards. So, the near term question is whether the Rousseff government will continue to cut rates in an attempt to jumpstart the economy, or whether the central bank will turn its attention to preventing inflation and a further weakening of the real and will, as a result, raise rates back into the double digits.

It’s going to be an interesting new year in Brazil, with the BM&FBOVESPA futures markets offering plenty of opportunities for new and unique trading strategies for foreign investors. The embers of an emerging powerhouse economy are still there smoldering, and it’s just a question of whether the Brazilian government can find the right policies to stoke the flames.

Trade Globally From Anywhere At Any Time

Recapping the #TTTop10: The Year
in Review

If you follow us on Twitter at @Trading_Tech, you’ve probably seen our compilation of 2012’s top 10 news stories in trading, tech and Chicago businessor as we called it on Twitter, the #TTTop10. To close out the year here on Trade Talk, we’re recapping that list.

We chose the news stories that made the biggest impact on the trading industry and on TT’s customers. Whether or not you agree with our selections, hopefully you’ll be entertained and informed by the list.

Without further ado, let’s count down our picks.

10) TT Gets Social

We joined the social media fray in a big way this year with our Twitter feed, our LinkedIn page, our TradingTechTV YouTube channel and, of course, this blog. In 2013, we’ll expand our social reach to other venues, including Google+. If you’re not already familiar with this increasingly popular platform, take a look at “Google+ Is Growing at Facebook Speed, a recent (and brief) article from Wired.

9) Chicago Tech Scene Emerges

Pundits from near and far wrote about the tech boom in TT’s toddlin’ (home)town. Among the reports were “’The Midwest Mentality’: Why Chicago’s Supposed Weakness May Be Its Greatest Strength” from The Atlantic and “Relic of an Era, Revitalized”* from the The New York Times. We’re loving this trend and very proud to be a part of it.

8) Libor Scandal

What’s a year without a scandal? We saw a big one unfold last summer, when news broke that several major U.S. and European banks had manipulated the London interbank offered rate (a/k/a the “Libor”) and other benchmark lending rates. The Financial Times created “Libor Scandal”*, an extensive web-based compilation of relevant coverage. It’s a good source for updates as the story continues to unfold.

7) No Prosecution for MF Global

Our industry was rocked to the bone in October of 2011 when MF Global imploded amidst widespread allegations of criminal wrongdoing. Although a whopping $1.6 billion in customer funds went missing and many cried for the government to bring a criminal case against ex-CEO Jon Corzine, a 10-month investigation failed to result in the filing of charges. An op-ed from The New York Times titled “Is MF Global Getting a Free Pass?” foreshadowed this outcome. Five months later, the Times made the bad news all but official in “No Criminal Case Is Likely in Loss at MF Global”. Meanwhile, The Daily News recently photographed Corzine roaming free in wealth-ridden East Hampton.

6) Eris Exchange and the Futurization of Swaps

Throughout 2012, the upstart Eris Exchange attracted an avalanche of media attention (and inked a connectivity agreement with TT) for its move to futurize interest-rate swaps by launching contracts that replicate swaps in a cheaper, more efficient manner. Waters painted a bright picture in Eris Exchange Seeks to Futurize, Standardize, Capitalize”*, and we covered the story on Trade Talk in “Swaps: They’re in Our Future”. More recently, news broke on December 20 that Morgan Stanley will make a strategic equity investment in the exchange and become an anchor bank liquidity provider. The Wall Street Journal spelled out the details in “Morgan Stanley Stake in Eris Exchange Spotlights Market Shift”*. With the deal slated to close in early 2013, and with TT’s new Eris Gateway scheduled to launch in the same time frame, we expect Eris Exchange’s star will continue to rise.

5) TT’s Platform Rebuild

TT made news in October when CTO Rick Lane announced here on Trade Talk in “The Pace of Innovation at TT” that development of a brand-new trading platform based entirely on the TTNET™-hosted ASP model was underway. Rick talked about the rebuild and other issues last month with MarketsWikiTV in this video. You’ll hear more about this next year as TT’s next-gen platform continues to evolve.

4) Regulation

Ah yes, what would our list be without this one? Not a day passed without a mainstream media mention of Dodd-Frank and regulatory reform. Waters recently provided an interesting perspective in “2012 Review: Economy, Regulation Create Perfect Data Storm”*. We even covered it ourselves on Trade Talk in “The New Role of the Software Vendor in the Midst of Risk Management and Regulatory Reform”. This issue will continue to be top of mind in 2013.

3) ADL™ Changes Trading

As we approach the peak of our list, we get to one that makes all of us at TT very proud. It’s ADL, the game-changing visual algo programming platform that we released with X_TRADER® 7.11 in March. Futures magazine tested X_TRADER 7.11 and awarded it a perfect four-out-of-four stars, citing ADL as a “potentially important programming innovation for the algorithmic trading community” and saying it “achieved its goal of providing a powerful graphical interface for the high-frequency algorithmic trader”. Read the full report in “Software Review: ADL/X_TRADER”.

2) Cliff Diving and Sandy

The runner-up in the #TTTop10 is actually two stories because we felt they were equally impactful.

At 2a is Cliff Diving, which every serious media outlet on the planet has covered ad nauseumespecially over the past few days, as we’ve been edging perilously close to the edge. Will the U.S. go over the fiscal cliff in a freefall towards economic doom and gloom or be saved by a last-minute deal? We’ll know very soon. For now, if you’ve been living under a rock and need a primer, you can read up on this debacle in “Stocks Sink 2% for the Week” from CNNMoney. Or if your eyes are starting to burn from reading the articles listed above, sit back and watch “MarketWatch Ahead: Cliff Diving”, a video from The Wall Street Journal.

At 2b is Hurricane Sandy, which ravaged the East Coast in October, killing at least 125 people and reportedly causing damages in excess of $160 billion. Sandy brought Wall Street to a grinding halt, forcing a two-day shutdown of New York’s iconic exchanges. “NYSE and Nasdaq Closed as Hurricane Sandy Hits” from CNNMoney reported the situation as it unfolded.

1) Trading Errors Abound

Atop our list of the year’s most important stories is the epidemic of trading errors and software malfunctions that plagued the industry in 2012. There were some biggies, including Knight Capital’s near-fatal mistake and the aborted BATS IPO. Rather than go through the details here, we’ll direct you to Traders Magazine, which devoted two covers to this ongoing story with “Glitch! Part 1” and “Glitch Part 2”.

That takes to the end of the list, which is fitting because we’re only hours away from the end of the year. If you’re inclined to share your top stories for 2012 or your predictions for 2013, please leave a comment here on the blog, or tweet us at @Trading_Tech and use the hashtag #TTTop10.

Thanks for joining us on Trade Talk these past few months. We look forward to connecting with you in 2013, and we wish you a happy, healthy and prosperous new year.

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“Hangout” Again with ADL™ on Tuesday

UPDATE: If you missed our live broadcast of the ADL Hangout, you can view the recording here.

Our first Google Hangout (below) featuring TT’s newest algorithmic trading tool, ADL, was so well received that we’re gearing up to produce another live broadcast on Tuesday, December 18th, at 3:30 p.m. CST.

If you missed our first ADL Hangout, click the “play” button above
 to watch the team build and launch an actual trading strategy with ADL

In our second episode, Product Manager John Yoo and Senior Business Analyst Tom Zagara will build the exit-side logic to the scalper algorithm introduced in the first episode. In doing so, they’ll also cover the Value Extractor Block and the concept of “virtualization”.

To watch the live broadcast, come to our YouTube channel, TradingTechTV, at 3:30 p.m. CST on Tuesday. No registration, login or special software is required. If you can’t watch us live, we’ll post the recording to TradingTechTV shortly after the event has concluded.

12/12/12 WEBINAR ALERT: Join TT
and Eris Exchange for a Demonstration
of Eris IRS Futures on X_TRADER®

UPDATE: If you missed our live webinar with Eris Exchange, you can view the recording here.As announced in September and discussed here on Trade Talk, TT will launch connectivity to Eris Exchange in early 2013.

To help our mutual customers learn more about these new trading opportunities and prepare for the rollout, TT and Eris Exchange will co-host a 30-minute webcast on December 12th at 3:30 p.m. CST/4:30 p.m. EST.

 

Michael Riddle, Eris Exchange (L) and Jeff Mezger, Trading Technologies (R)
 

The agenda will include an overview of Eris Exchange Interest Rate Swap (IRS) futures presented by Eris Exchange COO, Michael Riddle, followed by a demonstration of unique Eris-specific X_TRADER functionality by TT Senior Product Manager, Jeff Mezger .