BM&FBovespa SA (BVMF3), Brazil’s stock exchange, is facing a loss in market share estimated at as much as 30 percent by HSBC Holdings Plc and Banco Itau BBA SA as the nation considers boosting competition among trading platforms.
BM&FBovespa fell 12 percent in the five days through yesterday to a two-week low on concern surging trading in the world’s second-largest emerging market will lure rivals. As the only exchange in Brazil, BM&FBovespa has benefited from daily trading volumes that have climbed 50 percent in the past five years to a 100-day average of $4 billion. That compares with a 49 percent drop in the period for the top exchanges in the world’s 10 biggest stock markets.
Securities regulators will meet with market participants in July to discuss competition after commissioning a report that found opening up the market would reduce transaction costs by as much as 8.1 percent. The report, released this week, bolsters bids by Direct Edge Holdings LLC, Bats Global Markets Inc., Cetip SA-Mercados Organizados and IntercontinentalExchange Inc. (ICE:US) to compete against BM&FBovespa.
“With more competition, BM&FBovespa’s market share will fall, hurting its growth outlook,” Paulo Ribeiro, an analyst at HSBC, said in a telephone interview from Sao Paulo.
Ribeiro, who has the equivalent of a buy recommendation on BM&FBovespa, expects competition to start in 2014, with outside providers capturing 30 percent of equities trading by 2016. Itau analysts including Regina Longo Sanchez expect BM&FBovespa may lose 20 to 30 percent of its share, according to a June 18 research note. Itau has the equivalent of a hold recommendation on the stock.
Fending Off Rivals
BM&FBovespa, based in Sao Paulo, said it will discuss the report’s findings with Brazil’s securities regulator, known as CVM, before making comments on the issue, according to an e- mailed statement from the exchange’s press office.
The Sao Paulo exchange is working to integrate its clearing operations to lower margin requirements by up to 40 percent, which could help the exchange fend off potential competition, Chief Executive Officer Edemir Pinto said in an interview in August. The bourse said in a statement on its website that trading fees in Brazil are in line with other countries.
The report “confirmed what market participants always suspected: trading at BVMF is expensive and there are substantial gains to be extracted from introducing competition,” Banco Santander Brasil SA analysts including Henrique Navarro wrote in a note to clients on June 19.
BM&FBovespa’s shares in Sao Paulo have lost 1.5 percent this year, while Bolsa de Valores de Colombia has jumped 10 percent in Bogota and Mexico’s Bolsa Mexicana de Valores SAB has surged 17 percent. The Brazilian stock trades at 17.8 times its reported earnings, which compares with a ratio of 19.3 percent for the Colombian bourse and 20 for Mexico’s exchange.
While growth in trading volumes slowed to 2 percent in 2011 from 22 percent a year before amid concern about the outlook for the global economy, Brazil still offers attractive opportunities for foreign exchange operators, Ribeiro said. Foreign investors pulled 1.35 billion reais ($655 million) from the Bovespa in 2011, which compares with an inflow of 5.96 billion reais in 2010, according to data from the exchange.
Cetip, whose main businesses include collateral registration and fixed-income securities depository, is seeking permission to act as a clearinghouse for fixed-income securities, according to a regulatory filing on June 20. The company said in an April filing it signed a contract with IntercontinentalExchange to develop an electronic platform to trade fixed-income securities in Brazil. The announcement followed plans by Jersey City, New Jersey-based Direct Edge, the fourth-largest U.S. equity exchange, to start an electronic platform for stocks trading in Rio de Janeiro.
Bats and Sao Paulo-based Claritas Investmentos also signed an agreement to work on the creation of a new stock exchange with clearing and depository services in Brazil, according to a statement from Bats in Feb. 2011.
Ending BM&FBovespa’s monopoly would help spur economic growth, Oxera Consulting Ltd. said in the report commissioned by the CVM and released on June 18.
While the regulator says in a statement on its website the findings don’t necessarily reflect its views on the issue, the report will help it decide if a regulatory change is needed to deal with increased competition. BM&FBovespa is the second- largest exchange operator in the Americas after Chicago-based CME Group Inc., which owns a minority stake in the Brazilian bourse.
While the end of BM&FBovespa’s monopoly would likely drive trading fees lower, the impact on the company’s revenue should be offset by rising trading volumes, said HSBC’s Ribeiro.
“The market may be over-reacting a bit when it comes to the effect competition will have on BM&FBovespa,” Ribeiro said. “It will depend on how BM&FBovespa reacts to this competition. It could adopt a smarter pricing system instead of charging a flat fee to almost all investors.”
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