Taking the Sting Out of Emerging Markets

• Emerging markets are an attractive destination for trading firms seeking new sources of alpha.
• Trading in emerging markets requires mission-critical infrastructure.
• Low latency is critical to arbitrage or market-making strategies.
• Mexico is a key emerging for arbitrage traders.
• The Mexican Stock Exchange is the second largest stock exchange in Latin America.
• BSO is a flexible partner that will allow trading firms to test out their trading strategies in new markets.

Emerging markets have long presented an attractive proposition for trading and investment firms seeking new sources of alpha. With spreads becoming ever narrower on established US and European exchanges, and margins ever thinner, forward-looking trading firms – particularly those specialising in arbitrage or market-making strategies – are clearly aware of the potential of capturing the wider spreads that exist on other exchanges around the world, especially in those markets those where volatility is high.

Challenges vs reality

The reality however, is that setting up a trading operation able to take advantage of such markets is often a tricky - and costly - undertaking, with no guaranteed return on investment. Which is why firms are often reluctant to take the plunge.

The challenges are many and varied. Language barriers, regulatory hurdles, and lack of local knowledge and expertise are all obstacles to overcome, before firms even start navigating the infrastructure and communications complexities associated with trading. This is why even the larger proprietary trading and market-making firms, who generally have the resources to build and run infrastructure to trade on exchanges in US and Europe, often struggle to establish a presence on less familiar venues overseas.

However, those firms that are able to overcome the challenges, can reap significant rewards and gain an early led on their competitors.

Everyone is talking about Mexico

One market that is generating a strong level of interest currently is Mexico. The country operates two of the largest stock exchanges in Latin America - the Mexican Stock Exchange (BMV or Bolsa) and the newer Institutional Stock Exchange (BIVA) – as well as MexDer (the Mexican OTC derivatives exchange), all based in Mexico City. Bolsa also operates the international quotation system (SIC) for trading foreign stocks, which has seen a threefold increase in volume in the last five years, driven mainly by ETFs.

So how can US-based firms take advantage of the opportunities that Mexico - or any other emerging market – offers, with minimal risk and minimal investment?

This is where BSO can help. Emerging markets are part of our DNA. For over 15 years, we have been providing some of the industry’s most stringent trading desks with reliable, secure, low-latency access to some of the world’s most difficult to reach markets.

in Mexico for example, which is fast becoming a regional hub for high-frequency and systematic traders, we understand how important it is for firms to have the best connectivity and infrastructure available, as well as strong local support. This is why we recently upgraded our backbone route into Mexico City, making BSO the fastest low-latency connectivity provider to both BMV and BIVA. This further strengthens our position in the region, following a route upgrade to Brazilian exchange B3 and a strategic partnership with EllaLink, the express optical platform between Europe and Latin America.

Entering emerging markets

At BSO, we have a strong and solid reputation for understanding the nuances in the various emerging markets around the world. This means that we can help firms navigate their entry into new markets and avoid the pitfalls of trying to do everything themselves, which can also significantly reduce their costs. Rather than signing long-term contracts, sourcing racks, power, cross-connects, shipping equipment, and so on, BSO can do all the heavy lifting, by hosting equipment for our customers, connecting them to the exchange, enabling them to source historical data, test the latency back to their own PoP, and run non-production simulations. Then, if their strategies are proven to work after two or three months, they can go fully live and grow from there. And if their strategies don't work, they’ve only paid for 90 days and can move on. All of which makes entering a new market far less onerous and less costly.

in conclusion, the key for any firm looking to capitalise on the opportunities that emerging markets offer, is to work with a suitable partner, one who can help break down the myriad barriers to entry. Ideally, a partner with a strong history and a proven track record of supporting this type of business. A partner such as BSO.

Find out more why BSO should be your partner when entering emerging markets today. Book an appointment with Steve McConnell now here.