Electronic FX trading services across Latin America

Latin America has made significant strides in terms of its capital markets in recent years, typified by the growth of its FX market and the strengthening of its FX regulations. Countries such as Mexico, Colombia, Brazil, Chile, and Peru have led the way. As a sector-driven, commodity-based economy, the LatAm FX market is heavily reliant on macroeconomic variables such as inflation, capital flows, trade deficits and surpluses, and employment levels. It can also be impacted by macroeconomic and geopolitical events, which has caused some volatility in the last three years.

Cultural drivers

At the same time, we are also seeing a marked increase in the use of electronic trading in the LatAm FX market – partly a result of regulatory changes, technology development, changes in demographics and a desire to keep up with other international markets. “Latin America doesn’t want to be left behind in the global digital transformation that is taking place. Furthermore, the value of electronic trading is becoming more apparent to the local FX community as the Latin American market continues to develop,” says Paul Hopkinson, FXGO Product Manager, Bloomberg.

“Investments in electronic trading systems are being made by local banks who want to provide better client service, compete with global FX dealers, and adhere to national and international regulatory standards. As a result, there is now a greater emphasis on the needs of the client throughout the trade lifecycle, along with a need to reduce costs and boost operational efficiency,” says Hopkinson.

“When viewed from the buy-side, asset managers, hedge funds, and pension funds are under pressure to demonstrate best execution and increased transparency as well as wanting to gain access to offshore markets for hedging or investment purposes,” says Hopkinson. “When viewed from the sell-side, FX dealers look for ways to use pricing engines to create and distribute prices more efficiently, increase the number of FX instruments and currencies they offer to local clients, and apply hedging automation to manage risk more effectively.”

One important driver in moving the local LatAm FX markets to electronic trading venues is the strengthening of the local currencies in the main countries in the region, says Hopkinson. “Using MXN as an example, in recent years the Mexican peso has evolved from a national currency in an emerging market country, to a powerful international financial instrument. Companies looking to nearshore to the US often choose Mexico to take advantage of broad trade agreements between both countries. On top of that, Mexico has historically offered relatively high-interest rates that support the carry trade and has also benefited from political and democratic stability which is of great importance for global investors.”
Technology innovation has enhanced market liquidity in a number of ways in the fragmented FX markets across the globe and LatAm isn’t an outsider, says Hopkinson. “Electronic platforms, e-commerce or even the use of chats are enabling international traders and investors to access data and liquidity more easily across many venues making the trading process more efficient and reducing the costs associated with trade execution. With this increase in liquidity, more sophisticated investors are turning to algo execution to reduce transaction costs and minimise market impact. Notably, USDMXN is among the top dozen currency pairs of nearly 100 traded algorithmically on FXGO,” he adds.

When it comes to the appetite for digital assets in the region, the official policy responses of local authorities to cryptocurrencies and digital assets varies widely, from outright prohibition to the acceptance of Bitcoin as legal tender in El Salvador, says Hopkinson. “As with many other countries, authorities are concerned about the impact of cryptocurrencies on financial instability, corruption, terror financing and money laundering. And while retail market adoption is relatively high in LatAm, institutional participants are very cautious with respect to trading digital assets, and, like many other jurisdictions, are looking for regulatory clarity and tangible operational efficiency before making substantial investment.”

In terms of the future expansion of LatAm’s e-FX market, Hopkinson says that the adoption of electronic trading in several countries in the region is already significant and will continue to grow. “Outside of the main population centres, one of the key drivers of this expansion will be the availability of the technological infrastructure to support this. Implementation, growth and expansion in other ‘new’ countries will also begin as the macro-economic and political landscape provides stability for the development of the local FX markets in such countries,” he says.

“At Bloomberg, we are highlighting to clients in the region how our solutions can be utilised for both trading in the local markets with functionalities already available to support some of the specific needs of onshore communities, as well as providing access to the global trading community. This allows clients to use a single solution for all their trading needs. Electronic FX trading is more than just finding best price; it is also about utilizing a seamless, flexible, and intuitive platform to improve efficiency, reduce cost and mitigate risk,” says Hopkinson.

Global ambitions

According to Jose-Antonio Buenaño, head of sales, Americas at Edgewater Markets, the electronification of the LatAm FX market means that regional players are able to engage on a global scale. “Being rooted in the local context, they possess an intimate understanding of local macroeconomic data, central bank policies, and the political stability of LatAm currencies. Yet, their most critical advantage lies in their grasp of both onshore and offshore trade flows. With substantial trade volume in local currency pairs, they have positioned themselves as the ideal partners to handle large currency transactions for the emerging market (EM) portfolios managed by large asset managers. The key to all of this is having technical know-how coupled with credit and distribution services to facilitate the transactions,” says Buenaño.

In the current era of LatAm trading, local players are for the first time seamlessly entering the global marketplace, says Buenaño. “When we think of ‘deglobalisation’ this is what strikes us the most—the ascent of local and regional players, rather than the sole dominance of incumbent, global institutions. They achieve this by harnessing cutting-edge technologies enabling them to scale their operations with remarkable efficiency. This technological integration not only streamlines their processes but also enhances overall market efficiency, as these local providers emerge as the authentic sources of liquidity.”

Local banks have recognised that embracing technology is not only a means to reduce operational costs but also a way to enhance their competitive edge while extending their reach to regional and global networks, says Buenaño. “Additionally, the ability of tech companies to tailor their solutions to meet the specific needs and workflows of local clients, rather than forcing companies to conform to outdated technological limitations, has proven to be pivotal in the LatAm region,” says Buenaño.

At the same time, it has also made it easier for international traders and investors to access the LatAm markets, says Buenaño. “Electronic trading facilitates streamlined price discovery and efficient execution, but the true game-changer lies in the fusion of technology, credit access, and distribution. This synergy empowers institutions in LatAm and other emerging markets to significantly enhance their involvement in the global FX market.”

In LatAm, the driving force of innovation revolves around electronification and the ability to adapt technology seamlessly to meet unique workflow requirements, says Buenaño. “The electronification of NDFs represents one of the most pivotal advancements in the LatAm FX markets, empowering local banks to reestablish their pivotal position in their domestic currencies with the global marketplace. This achievement owes itself to the deployment of potent and adaptable technology, capable of seamlessly integrating new workflows, accommodating evolving data requirements, and establishing robust local data centres,” he says.

When it comes to digital assets, Buenaño echoes Hopkinson’s view that adoption and appetite are still at early stages. “Institutional investors across LatAm are increasingly expressing interest in the realm of digital assets. It’s important to acknowledge that we are still in the early phases of this transition, with El Salvador’s groundbreaking move to embrace Bitcoin as a noteworthy example. However, achieving widespread adoption within the region necessitates the establishment of a sturdy regulatory framework. Substantial efforts are underway to pave the way for institutional investors by providing them access to the digital asset market through comprehensive trading services.”

In Buenaño’s view, Latin America is in the midst of a new technology era, starting in Brazil and expanding along the Andean corridor and beyond and firms such as Edgewater Markets will look to continue driving this momentum, enhancing trade flows and market efficiency in the region. “To excel in global markets, financial institutions should prioritize three key elements: adaptable technology to support diverse trade flows from various partners, efficient execution partners with a robust global clientele network, and credit intermediation for swift and risk-conscious participation in global markets,” says Buenaño.

Mindset change

Having worked for a bank and covering clients in the region for 15 years before returning as a tech provider, Eliane Pereira-Dousie, head of sales, Americas, MaxxTrader, says that the most interesting change among market participants has been the mindset. “Whereas a few years back, sitting down with a trader to discuss e-trading was a very educational conversation, now it is a two-way fluid conversation. Traders are interested in liquidity diversification, auto-hedging tools, and distribution. They do not want just another aggregator. They are looking for a knowledgeable and reputable technology partner that can help them solve inefficiencies in their workflows and make them more competitive.”

There is also an openness to discuss algos, trading channels, new technologies and the use of data science, says Pereira-Dousie. “The arrival of young and tech savvy people in the workforce and openness to new technologies has had tremendous impact in the digital transformation of the markets and use of electronic trading platforms. Many of these newcomers have an entrepreneurial spirit, coupled with an innovation-driven mindset and are interested in learning about new technologies. I think this trend will continue, especially given that the average age in countries like Brazil and Mexico are in the low 30’s.”

There has been rapid digital adoption in the region, says Pereira-Dousie. “In a way, the pandemic was a wake-up call for smaller economies. Large organisations equipped with the appropriate technological resources stayed ahead of the competition. The pandemic brought on much needed change in the financial markets. It highlighted the importance of connectivity and having electronic and digital access to financial markets and services.”

And while the concept of ‘e-desks’ is new to the region, locals now see the value in the electronification of their FX business to optimise resources, workflows and to reduce costs, says Pereira-Dousie. “Clients are looking for tech partners that understand local market structure and cultural nuances. The availability of new technologies and greater access to the internet has facilitated the use of e-trading platforms and mobile apps.”

There are various factors influencing the evolution of e-FX trading in the region, says Pereira-Dousie. Firstly there is the increased importance of local currencies in the global market. “Looking at global rankings, MXN and BRL are among the top 20 in total FX turnover. However, if you look at the local currency landscape, most banks in Brazil for example still have large trading desks with 80% of trading volumes in the local currency, BRL. In Mexico, the flow is around 90% in MXN. Local markets operate very efficiently and with transparency. Brazil and Chile, for example, are sophisticated markets, with an exchange-like mindset, wherein Spot price is derived from listed markets making these currencies very liquid onshore.”

Technology advancements have also been important, says Pereira-Dousie. “Brazil has been at the forefront of technology innovation. According to Bill Gates, Brazilian bank Bradesco, was the first bank worldwide to provide online banking to consumers. Brazil is also the second largest market for messaging app WhatsApp so there is little surprise to see Brazil adopting and embracing new technologies in various markets.”

Mobile connectivity is also a key factor, says Pereira-Dousie. “The implementation of 4G has more than doubled across the LatAm region in the last five years, and is expected to spike even further with the migration to 5G. According to 5G Americas, the region, combined with the Caribbean is projected to have 398 million 5G connections by 2027. This huge uptake in 5G will mean that mobile connectivity and usage will explode, and apps that offer FX trading capabilities will be a firm necessity for institutional FX trading.”

One of the main benefits mobile apps offer institutional investors is flexibility, says Pereira-Dousie. “Mobile apps mean that traders can access markets from anywhere at any time. At MaxxTrader, we understand the importance of ‘being local,’ and developing products and tools to help the local markets. We understand the importance of mobility. We have designed and optimized our mobile app to offer clients the ability to execute and manage workflows on-the-go.”

There has been remarkable growth in the region’s fintech market, says Pereira-Dousie “Major global banks are recognizing the potential of FX fintech in Latin America. For instance, Citi made a strategic investment in Rextie, Peru’s leading fintech for FX services, marking it Latin America’s first FX fintech to receive an investment from one of the world’s largest banks. This represents a significant recognition of the potential of Latin American fintechs in the FX space.”

Local banks are also investing in crypto and the use of blockchain and DLT, says Pereira-Dousie. “They are setting up digital businesses, well-staffed with readiness to go live once regulatory approval is in place. Their use of AI and ML is impressive. Banks are using these new technologies to improve decision-making in FX trading and to automate trading strategies and hedging.”

So where should investment in the region’s FX market be focused to make the most of this growth? “Along with consistently embracing new technology, it is pertinent to prioritise education and training to fully understand the complexities of FX trading,” says Pereira-Dousie. “This knowledge can help them make informed decisions and manage risks effectively. Compliance with local and international regulations is also essential. And in terms of where future investment should be focused, areas such as advanced technology like AI and machine learning, cybersecurity, and regtech are becoming increasingly important in the e-FX space. Investment in these areas can potentially enhance trading efficiency, improve security, and ensure regulatory compliance.”

Exponential growth

“The electronic forex exchange market in LatAm has seen exponential growth in recent memory, even amidst uncertainties like the pandemic,” says Ricardo Grados, head of e-liquidity institutional sales at Finalto, the UK-based FX trading software vendor. The market volume grew from 5.6 trillion in 2020 to 7.5 trillion in 2022, a rise that Grados attributes to the advantages that e-FX offers over traditional FX trading methods. Other key drivers include increased accessibility for retail investors through brokers, prop trading firms, and FX network marketing schools, which have attracted millions of new traders, says Grados. Moreover, several new brokers emerged in LatAm over the past 4-5 years, with many leveraging white label solutions, resulting in potential conflicts of interest.

“This growth is being reinforced by key players in the e-FX market including central banks, banks, hedge funds, investment managers, commodities trading advisers, brokers, retail aggregators and corporations. It is because of this support that growth is unlikely to slow,” says Grados.

Trade challenges in Latin America, such as fluctuating commodity markets and global tensions, have highlighted electronic commerce’s potential, says Grados. “While there’s some regulatory progress for fintechs, many countries like Mexico, Chile, and Argentina lack comprehensive rules for e-FX/CFD Retail Brokers. Regulators currently prioritize centralised market entities like banks and hedge funds over decentralised ones. Most major players, bound by tradition, still conduct trades via phone or chat, shying away from electronic platforms. However, cultural shifts and tech innovations are driving change, with institutions like pension funds seeking transparency and best execution.”

LatAm regulators face several deterrents when considering e-platform adoption, says Grados. “These include concerns surrounding potential job losses due to automation, regulations mandating in-jurisdiction data centres, and fears that international trading could undermine local monetary control. On the other hand, e-FX platforms present compelling advantages, such as providing evidence of best execution, ensuring price transparency, adhering to codes of conduct, enabling efficient trade confirmation and settlement, and offering comprehensive cost analysis. Embracing e-FX platforms could empower regulators to strike a balance between addressing concerns and harnessing the benefits of advanced trading technologies for the region’s financial markets.”

The evolution of electronic FX trading in Latin American countries is influenced by several key factors, says Grados. “One significant driver is the rapid expansion of internet and mobile technology, granting access to over 530 million people in the region. The emergence of OTC markets around a decade ago has also opened up new opportunities for e-FX trading channels, with platforms like Bloomberg and Reuters promoting FX products. Moreover, the region’s growing appetite for retail FX trading is fuelled by easy access to credit lines, technological innovations, and overall economic growth. Alongside these developments, increasing competition among FX providers, including large brokers entering the region and the rise of white-label brokers and local startups, is shaping the landscape and giving retail traders a wider range of options.”

At the same time, leading e-FX providers in Latin America have been actively expanding their portfolio of products and services to meet market demands, says Grados. “They are enhancing their electronic trading platforms, real-time pricing solutions, and pre & post-trade FX toolsets to offer more flexibility and power to their clients. This includes advanced trading platforms with user-friendly interfaces, improved order execution, access to multiple sources of liquidity, real-time pricing solutions, and advanced risk management tools. They are also catering to algorithmic traders and institutional clients by offering APIs for automated trading strategies. Additionally, these providers are promoting financial education through webinars and market analysis, ensuring regulatory compliance, and bolstering customer support for a comprehensive and efficient forex trading experience in the region,” says Grados.

Conclusion

“Technology is revolutionising the way we trade forex, and it’s fascinating to see how new advancements are making a real impact,” says Grados. “Innovations in FX Fintech are transforming the forex trading landscape across Latin America. Key technologies like blockchain, AI/ML, and DLT are driving this evolution. Blockchain’s potential in forex is significant, enabling secure and transparent cross-border transactions while reducing costs. AI-powered advanced trading algorithms crunch vast data, leading to more efficient and profitable strategies for traders. Sentiment analysis, also fuelled by AI, offers valuable insights from various sources, aiding in informed decision-making.”

DeFi platforms built on DLT are gaining momentum in the region, providing decentralised access to financial services, empowering traders with more control over their assets while robo-advisors are using AI to offer automated investment advice, says Grados. “Of course, as technology progresses, security remains paramount, with DLT and Blockchain providing tamper-resistant and fraud-resistant transaction records, safeguarding client data. While these advancements promise an exciting and accessible forex trading experience, regulatory considerations and challenges must be addressed. Nonetheless, this era heralds a transformative period for FX fintech in Latin America and an exciting time to be part of the FX fintech world!”