ATS Brasil hopes to break stock market monopoly

This could be the year that competition returns to the Brazilian stock market.

Americas Trading System Brasil — a joint venture between Americas Trading Group (ATG), a Brazil-based electronic trading company that serves key Latin American markets, and NYSE Euronext — is seeking regulatory approval to open Brazil’s second exchange.

If all goes as planned, ATS Brasil will get a license during the first half of 2014, begin testing and launch in 2015, said Alan Gandelman, the venture’s chief executive.

At one point, there were eight regional exchanges in Brazil. But the Sao Paulo Stock Exchange (Bovespa) began buying them up. By 2008, when Bovespa merged with the Brazilian Mercantile and Futures Exchange, forming BM&F Bovespa, it had become a monopoly.

Although Brazil is the sixth largest economy in the world, BM&F Bovespa has only 361stocks listed, which would rank it between exchanges in Mongolia and Vietnam. And, Gandelman said, 10 very large companies — Petrobras and Vale among them — account for about 50 percent of trading volume.

“There’s not a lot of trade quite frankly,’’ said Gandelman. “Bovespa doesn’t represent the Brazilian economy at all.”

Another anomaly in Brazil, he said, is despite a growing middle class, very few Brazilians have ever owned stocks — about 560,000 people in a population that is approaching 200 million. That’s lower than stock ownership in Ghana, Zambia and Kenya.

“This is a big negative for Brazil, but it also represents a big opportunity,’’ said Gandelman.

The idea for an alternative exchange was hatched about eight years ago when Gandelman and a group of colleagues worked together at the Brazilian brokerage Agora. Those colleagues would become the major shareholders of ATG.

“We heard a lot of complaints from customers, especially international customers,’’ Gandelman said during a recent visit to Miami where ATG’s U.S. headquarters is located.

“We realized there was not only room for, but also a need for, another exchange. The exchange monopoly not only is making trading more expensive and somewhat inefficient, but it is also holding back the development of companies,’’ said Gandelman.

ATS Brasil, he said, expects to be able to offer lower fees through a leaner structure with fewer people, an efficient business plan and new technology.

But BM&F Bovespa also has begun to reduce fees, extending lower exchange fees to day traders on the cash equity market last April and instituting more fee reductions in December.

“We are in a fierce competition prior to competition,’’ said Gandelman. “It’s a war zone.”

AFS Brasil submitted its application last June to the Brazilian Securities and Exchange Commission to operate an exchange and has since had a number of conversations with regulators.

“The regulators do understand what we’re trying to do. Eighteen months ago everyone was saying it wouldn’t happen. But we expect to get approval for a license in the first half of 2014,’’ said Gandelman.

“Brazil has reached a point of no return — competition will happen,’’ he said. “Even Bovespa has officially agreed that competition is coming.”

BM&F Bovespa currently operates the only clearinghouses in Brazil for stocks, derivatives, bonds and foreign exchange, and initially balked at the idea of providing clearinghouse services for a competitor.

It now says it will be able to offer clearing and settlement services to rivals in 2015 after it unifies its four clearing operations.

In BM&F Bovespa’s fourth-quarter statement, Chief Executive Edemir Pinto said the company had made significant advances in starting a new unified clearinghouse and that testing had already begun.

“But if it takes them longer to unify then expected, it could push back our whole process,’’ said Gandelman.

So in March, ATG and Risk Office, a Brazilian risk management consulting company, plan to file an application with the Central Bank to run their own clearinghouse for equities. A Brazilian commercial bank and an international clearinghouse are also expected to be part of the venture, Gandelman said.

Rio de Janeiro-based ATS Brasil would be a customer.

“I think we’re making history in Brazil — quite frankly in the whole region,’’ said Gandelman. “Breaking the monopoly and fostering competition will help the whole country.”

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