Mexico’s stock exchange group, Bolsa Mexicana de Valores (BMV), is to introduce sweeping regulatory and technological changes aimed at attracting high-frequency traders and repatriating trading that has migrated overseas in recent years.
The changes, unveiled at the end of last week, are a sign that exchanges outside the big financial centres of New York and London are also gearing up to attract liquidity from a new breed of electronic operator that is sometimes known as “high-frequency” traders.
Jorge Alegría, chief executive of MexDer, the derivatives arm of BMV, said: “The global trend is electronic trading, and these reforms aim to fully recognise and support that trend.
“The idea is to eliminate the limitations that were hindering the market.”
The changes at MexDer’s parent will affect the way – and the speed with which – brokerages send their orders to the bourse.
Brokers will be allowed physically to locate their computer servers and potentially even those of their clients, next to the stock market’s matching engine.
The proximity is expected to cut “latency” – the time it takes for messages to be sent between computers and a critical factor in algorithmic trading.
From August, brokers will also be able to set up multichannel links into the bourse, which will enable them for the first time to organise orders efficiently instead of funnelling them all through one slow and cumbersome channel, as has been the case until now.
The new rules are expected to provide an unprecedented boost in algorithmic trading, an increasingly dominant form of trading in which orders are generated by computer programmes.
Algorithmic trading greatly increases the volume of orders entering a bourse, creating potential bottlenecks when the brokerages handling the incoming orders only have one access channel to the market.
A second regulatory change, which was approved at the end of January, makes it much easier to carry out so-called crosses – in which a brokerage undertakes a transaction through the stock exchange between two of its existing clients.
The new rules allow brokerages automatically to cross up to 50 per cent of the average daily trading volume of a stock. Previously, such transactions ran the risk of getting interrupted by third parties, who could take positions in the shares changing hands as they passed through the exchange.
That risk led many investors to favour carrying out transactions of Mexican companies’ American Depositary Receipts (ADRs), which are traded in New York where commissions are much higher than in Mexico but where crossing rules offered more certainty.
Analysts say that the change will likely encourage some investors to return to the Mexican Stock Exchange to take advantage of the lower commissions.
“Mexico stands to win back some of the business because it will no longer be competing on execution of the trade but on price,” said Tomás Lajous, executive director of UBS Mexico Strategy and Research.
Additional reporting by Jeremy Grant in London