UBS AG (UBSN)’s bet on high-frequency trading helped it overtake Swiss rival Credit Suisse Group AG in Brazil’s equity markets for the first time.
High-speed trading is the only part of Brazil’s stock market that’s growing, as fees, trading volume and new-share offerings decline. Before UBS bought Sao Paulo-based Link Investimentos last year, giving it the fastest-growing brokerage in the country, Credit Suisse dominated trading since at least 2007, according to BM&FBovespa SA (BVMF3) rankings through May.
Barclays Plc and Deutsche Bank AG are among companies that have scaled back their equity teams in Brazil in response to the decline in underwriting revenue and trading volume. Trading this year will be even lower than usual due to the World Cup soccer tournament, according to Edemir Pinto, CEO for BM&FBovespa.
“Since the 2008 crisis, the environment for broker-dealers is getting tougher every year, with costs rising due to increasing technological needs and revenue falling due to reduced fees and trading volume,” Pinto said in an interview. The traditional brokerage firm focused only on the equity market “is destined to die,” he said.
UBS won regulatory approval to buy Link in January 2013, almost three years after announcing the 195-million-real ($87 million) acquisition. It has since renamed it UBS Brasil Corretora.
“We wanted to be first in the rankings, but I realized it was impossible without reaching international investors,” said Daniel Mendonca de Barros, a founding partner of Link and now chief executive officer of UBS Brasil’s broker-dealer. “About six banks approached us for a partnership, and we chose UBS because it’s one of the top three in equity trading in the world, with a huge presence in Asia.”
Foreign investors, mainly high-frequency traders who use super-fast computers to buy and sell, helped UBS trade 190.8 billion reais in equity and equity options on the BM&FBovespa through May, according to data compiled by the exchange. The Zurich-based bank boosted its market share to 14.1 percent from 11.4 percent for all of 2013, surpassing Credit Suisse (CSGN)’s 12.2 percent stake and 164.9 billion reais in total trading.
Foreign investors account for 50 percent of equity trading in Brazil, up from 28 percent in January 2010, according to BM&FBovespa.
“We were one of the first in Brazil to bet on algorithmic trading and invested 20 million reais in technology, and now it’s paying off,” Mendonca de Barros said. UBS is now bringing to Brazil its international-trading system Pinpoint, which it already uses in 26 countries. Mendonca de Barros said Pinpoint will make it easier for non-Brazilian investors to trade in the country.
“We lost first place but the year hasn’t finished yet,” Jose Olympio Pereira, CEO for Credit Suisse in Brazil, said in an interview in Sao Paulo. “I bet we are one of the few firms that really makes money with pure equity trading in Brazil, without including revenue from underwriting new-share issuance.”
Credit Suisse will keep its focus on buy-and-hold funds, pension funds and other types of institutional investors, Pereira said.
Morgan Stanley, the biggest equity trader in the world, held on to third place in Brazil and increased its stake to 9.3 percent from 7.7 percent for all of 2013, on volume of 125.5 billion reais through May.
Morgan Stanley invested in technology that allows it to execute more complicated transactions in Brazil, such as equity options, that previously required a third party, said Tiago Pessoa, co-head of equities in Brazil for the New York-based firm.
Eduardo Mendez, Morgan Stanley’s other equity co-head, said in an interview that the bank’s prime brokerage provides leverage and custody services for large Brazilian hedge funds.
“We give access to the Brazilian markets to investors from Europe, the U.S., Latin America and Asia using our balance sheet with structures such as total-return swaps,” Mendez said.
Broker-dealer fees have dropped to as low as 0.03 percent per trade, below the 0.09 percent average for 2013 and 0.2 percent in 2002, according to Credit Suisse.
Daily equity trading in Brazil, the world’s biggest emerging market after China, fell 11 percent this year through June 10 to 6.61 billion reais, from last year’s daily average, according to BM&FBovespa. New share issuance declined 42 percent to $6.39 billion through June 11 from the same period in 2013.
Of the roughly 34 independent broker-dealers, those not owned by banks, half are posting annual losses and about 20 percent are in “real difficulty,” BM&FBovespa’s Pinto said. “Broker-dealers are suffering all over the world.”
Barclays closed its Brazil equity-research team and reduced the size of its equity-trading business in January 2013, as part of a global restructuring aimed at eliminating businesses that didn’t meet profit thresholds at the London-based company, people familiar with the cutbacks said at the time.
Earlier this year, Frankfurt-based Deutsche Bank reduced staff for the equity business in Sao Paulo, two people with knowledge of the matter said at the time.
Barclays, which started its Brazil brokerage business in April 2010, was the 28th biggest with a 0.6 percent stake. Deutsche Bank ranked 17th with a 1.7 percent stake. New York-based Goldman Sachs Group Inc., which began trading equities in Brazil in 2009, ranked 10th on the BM&FBovespa this year though May, with a 3.1 percent stake.
Paulo Levy, executive director for individual trading at ICAP Brasil, said the market is in a “strange phase” as investors await the outcome of the October presidential election.
“Volumes are low, especially coming from individuals, the segment that suffered the most in the past years,” Levy said.
Trading by individuals dropped to 15 percent of the total in May from 31 percent in January 2010.
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