Analysis: Brazilian inter-dealer broking grows up

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On Brazil’s financial markets it is almost as if the global crisis never happened. On September 16, a day after the anniversary of the collapse of Lehman Brothers, trading volume on the equities section of the BM&FBovespa hit an all-time high. Stock prices and the currency are back to pre-crisis levels.

Foreign investors, who sold heavily on Brazil’s highly liquid markets as the credit crisis unfolded, are heading back. Between June 2008 and January this year they took more than R$26bn from the BM&FBovespa’s equities segment. Since February, they have returned more than R$15bn.

The increasing significance of Brazil for international investors has acted as a magnet on the world’s inter-dealer brokers – brokerages that specialise in trades between big market dealers rather than individuals, typically operating with large volumes at low margins.

Terry Smith, chief executive of Tullett Prebon, says the inter-dealer broking business has been ”going onshore” in recent years, to places like Brazil, rather than automatically being done in the biggest financial centres in the northern hemisphere. 

”If you’d gone back five years you would have found that the vast majority of [Brazil-related] business was conducted via New York. Increasingly it’s being done by brokers operating out of São Paolo. Some of those brokers have developed in to very credible operations; it’s by no means the wild west there.”

Icap, the world’s biggest, moved as early as last November, buying Arkhe DTVM, an independent Brazilian broker it had dealt with for several years.

It expected big things of its Brazilian operation. Presenting Icap’s results for 2008 in May, Michael Spencer, chief executive, said: “By this time next year Icap Brazil will probably be our fourth largest office in the world, maybe our third largest.”

Icap later surprised some market participants by announcing what it called “Radiohead” commissions on stock trades in Brazil, allowing customers to decide what fees to pay, from as little as R$5 a trade, compared with R$20 often charged by other brokers. The move – based on British rock band Radiohead’s decision to allow fans to pay what they wanted to download its album “In Rainbows” – was seen as a bid to attract equities business from market leaders such as Goldman Sachs, Credit Suisse and Morgan Stanley. Icap declined to be interviewed for this article.

For exchange-traded products such as equities, commissions are expected to become scarcer as dealers migrate to direct market access, allowing them to deal directly on exchanges with no intermediary. But a different factor drawing inter-dealer brokers to Brazil is the rising volume of over-the-counter (OTC) trades in futures and other derivatives. All such trades in Brazil must be cleared through BM&F Bovespa, while a separate entity, Cetip, handles depository and clearing services for fixed-income securities.

In June another inter-dealer broker, BGC Partners, said it had completed the purchase of Liquidez DTVM, a local inter-dealer broker of foreign exchange derivatives, commodities, equities, credit and interest rate products.

Lee Amaitis, BCG’s vice chairman, says the Brazilian model is a “healthy” one for broker intermediaries. “The exchange doesn’t make prices on OTC products, brokers do. Brokers are directing liquidity and market order flow into the exchange.”

One big opportunity for inter-dealer brokers is to offer Brazilian products to international customers and vice versa. “Liquidez on its own is pretty good, it’s the number two in Brazil and it’s been around a long time,” Mr Amaitis says. “What it lacks is the technology and balance sheet to give it scale. If you bring those you can become a powerhouse. Their client base is Brazilian only and so far they have linked into North America through us. That will change now with ownership.”

Bernardo Mariano of Research Equity Desk, a New York research firm specialising in exchanges, says interest in Brazil will keep growing. As well as the arrival of more inter-dealer brokers, he sees equity investors tapping the market through the forthcoming initial public offering of shares in Cetip, announced in August. The clearing house – which postponed an IPO last year because of the global crisis – aims to raise as much as R$4bn by selling half of its shares. As recently as May, Advent International, a private equity fund, bought 30 per cent of Cetip for $171m.

Mr Mariano says Brazil offers potential because its markets remain underdeveloped. Corporate credit, for example, is equal to just 22 per cent of gross domestic product, compared with 44 per cent in Japan, 96 per cent in the UK and 160 per cent in the US. Mortgage debt is just 2 per cent of GDP. OTC derivatives are equal to 40 per cent, compared with 5 times GDP in Spain, 13 times in Germany and 14 times in South Africa.

“New intermediaries will offer new products because they have more experience in developed markets,” he says. “There is huge expectation in the credit market. It’s going to explode.”

Additional reporting by Jeremy Grant in London

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