High-speed share sale and purchase operations authorized by the Security and Exchange Commission (CVM) at the beginning of August made their debut this week in the Brazilian stock exchange with Link Investimentos.
Last Wednesday 15, that broker made the first high-frequency trading for an institutional client in Bovespa. "The operation involved R$ 4 million of sale and purchase of shares'", said Daniel Mendonça de Barros, Link Managing Partner to Valor.
The operation followed the 'co-location' method, where clients install their own computers beside those located in Bovespa data processing center.
Co-location is the fastest and more sophisticated method for the so-called direct market access (DMA), i.e. without the mediation of brokers' system. In traditional transactions, investors will send their orders to Bovespa trading system, Mega Exchange, using a broker's software.
In addition to 'co-location', there are other methods of DMA available to investors. A slower model is that through a provider, where the investor connects directly to an access provider authorized to trade. The investor may also access the exchange trading platform through a direct link. "Co-location" is generally used for negotiations automatically made by computers, which buy and sell shares in milliseconds using algorithm-based programs.
To Barros, from Link, the combination of expanded high frequency with the fee discount policy will result in an expressive increase of share trading volume. He reminds that in the United States, algorithm-based high-frequency trading accounts for 70% of share trading. "There is a great room for high-frequency trading increase here, which is likely to promote the increase of traded volume."
Technology development work (software and hardware) for 'co-location' adoption took around two years, says Barros. Thereafter, the client pays the rental of a space in the stock exchange in addition to brokerage fees on operations. "Brokerage fees decrease as the number of trades increase," he adds. "We will earn from trading increase", he declares.
The Link client who made the first deal was a major investment fund of a corporation, which had been established to manage the funds of its actual partners. Barros expects to close the year with 10 'co-location' clients. "They include major institutional clients who own quantitative funds," he adds.
However, high frequency will also benefit small investors, Barros says. With the increased liquidity, the difference between put and call options is likely to decrease, which will end by reducing the trading cost for all other investors.