The fast-moving electronification of Brazil’s futures and stock exchange has continued with the latest in a series of contracts for complex event processing (CEP) platforms to facilitate high-speed algorithmic trading seeking arbitrage opportunities between assets traded in Brazil and overseas.

The arrival of CEP systems over the past year is part of several initiatives providing greater and faster access to Brazil’s exchange for overseas traders and to foreign assets for traders in Brazil.

The BM&FBovespa – formed last year by the merger of the São Paulo futures and stock exchanges – is currently the fastest-growing exchange in the world according to Mondo Visione, which tracks global exchanges. Its market capitalisation grew by 17.6 per cent in September and by 65.7 per cent over the past year.

Investors have been attracted by Brazil’s solid macroeconomic fundamentals and positive outlook. The country shrugged off a short recession caused by the global crisis to return to growth in the second quarter. Analysts say it offers high rates of growth in areas such as consumer and corporate credit, where penetration is very low by international standards, and because as a diversified commodity-based economy it offers a natural hedge against global inflation.

Kairos Asset Management, a São Paulo hedge fund manager, said it would use a CEP system developed by StreamBase Systems, a US software company specialising in trading platforms.

It follows about 15 contracts for similar systems provided by Progress Apama of the US that have helped some of São Paulo’s largest brokerages increase their trading volumes by as much as 100-fold.

Kairos has a $50m fund for foreign institutional investors that seeks to gain from differences in prices between Brazilian equities and their equivalent American Depository Receipts (ADRs) traded on the New York Stock Exchange. It also seeks similar price differences between related US dollar and Brazilian real futures.

Alberto Araújo, managing director, said Kairos chose StreamBase after testing several rival systems.

“We are used to trading through electronic systems but this is a completely different concept,” he said. “CEP makes a total difference in terms of gaining an edge in local and US markets as we look for cross-border arbitrage opportunities.”

He said the CEP system made a difference of about 100 milliseconds in the time taken to identify and execute trades and that it could be used to switch quickly and easily between asset classes, something not possible using standard electronic systems.

CEP systems have found users in several business areas around the world where complex and different types of information need to be processed quickly. They have made swift inroads on financial markets where they give a strong competitive edge to traders with access to them.

Dan Hubscher of Progress Apama said his company had sold CEP platforms this year to Agora, Alpes and Finabank, three of the biggest brokers in São Paulo, in spite of the global financial crisis.

“It’s very interesting to watch Brazil’s capital markets react to the world crisis,” he said. “The BM&FBovespa has got very aggressive in the last year trying to attract a lot of business from around the world.”

He said algorithmic trading in Brazil was going through the same process already seen in the US and other markets. “It’s opening up very quickly,” he said. “There’s been a predictable ripple effect. Once the coin has dropped in the pond, all the brokers need to start tooling up to take advantage of new opportunities.”

Wagner Marcelo Monteiro Borges, director of Finabank, Progress Apama’s most recent customer, said the system had allowed Finabank to increase the number of orders placed each day from 50,000 to 5m.

“the ability to trade in such magnitudes and monitor all transactions in real time will substantially increase a trader’s competitive edge while increasing the ability to manage the risks inherent in electronic trading,” he said.

Mr Araújo said about 10 per cent of trading on the BM&FBovespa’s equities segment was carried out by algorithmic traders and about 2.5 per cent of trading on the derivatives segment. “By the end of the year that will have grown fourfold at least,” he said. “Most asset managers are running against time to hire new systems.”

He said Kairos had been operating co-location – where big traders install servers inside an exchange’s premises – at the BM&FBovespa for the past two weeks and he would be in New York this week to discuss setting up a similar arrangement at the NYSE.

He said he expected his to be the first Brazilian fund manager to use co-location in New York but that big investment banks operating in Brazil such as Morgan Stanley, Credit Suisse and Goldman Sachs would make similar moves.