The e-FX market in Latin America has long been considered ripe for further growth and expansion. This is partly because the region has lagged far behind other parts of the world in its adoption of technology and in the evolution of its capital markets.
Several factors are starting to accelerate this potential and the region’s financial trading landscape is at long last witnessing some exciting transformations. The question now is whether this growth will continue at an exponential rate. The volatility of the local currency rates are tied somewhat to commodity markets and geopolitical trends, both of which are currently to the forefront but which may not remain so. Meanwhile, regulation and technology advancement will all have a role to play in ensuring the region’s e-FX market continues to flourish.
Retail FX growth
According to Ricardo Grados, e-Liquidity Institutional Sales LATAM for Finalto, who has a specialised knowledge of the LatAm region, one of the key drivers for retail FX trading has been the increasing penetration of internet and mobile devices across Latin America. “As more people gain access to these technologies, the potential user base for e-trading platforms expands, reaching individuals beyond the main population centres,” says Grados.
The OTC market only really emerged 10 years ago in LatAm and this has created a lot of opportunities for e-FX trading channels, says Grados. “We now see many firms in Latin America promoting FX products on their institutional platforms. At the same time the appetite for retail e-FX trading across the emerging markets, including Latin America, is also rapidly growing much of it driven by the easy access to credit lines, technology innovation and regional economic growth.” It’s not surprising therefore that competition amongst retail brokers in LatAm countries is also getting more intense, says Grados. “We have seen many big FX brokers starting operations in Brazil, Mexico, Peru Chile, Colombia and elsewhere. Some are doing well and others are not. And new white label brokers and new local brokers are giving their retail clientele a range of options to trade the e-FX market in ways they have never had before so this competition amongst providers is only going to grow more.”
Consequently, there is now an abundance of different options and ways for retail brokers and new traders to the enter the FX market. Furthermore, the gradual improvement of financial infrastructure, including payment systems and digital banking services, lays a strong foundation for the broader expansion of e-trading services, says Grados. “This progress enables individuals from various regions, including smaller towns and emerging urban centers, to seamlessly access global markets and execute trades.”
“Emerging urban centers will become key hubs for e-trading growth, given their growing middle class and improved access to technology and financial services”
Ricardo Grados
However, there are also some challenges that need to be overcome if LatAm’s e-FX market is to reach its full potential. Many of these challenges are external – globalisation, geopolitical tension, international trade and macroeconomic volatility.
The electronic forex exchange market in LatAm has been somewhat resilient in the face of recent uncertainty, according to Grados. It has continued to grow at an exponential level despite the uncertainty caused by the pandemic and then more recent economic volatility and geopolitical changes in the post-pandemic period.
Grados says that the benefits of e-FX over traditional methods of trading continue to become more obvious, including the growing involvement of more sophisticated retail investors. “The appetite for e-FX retail trading has grown after the pandemic exponentially, jumping from being a market of 5.6T in 2020 to 7.5T as of 2022,” he states.
Regulatory developments
Regulatory developments are also playing a crucial role in shaping the e-FX market’s growth trajectory, says Grados. “As regulatory frameworks evolve and provide more clarity, traders and investors are gaining more confidence in the legitimacy and security of e-trading platforms. This increased trust and transparency encourages participation from individuals and institutions across the region.”
A cooling in global demand combined with volatility in commodity markets and tension in global trade, has helped to strengthen the case for more electronic trading. But there has not yet been the regulatory adaptation that would enable electronic trading to flourish in the LatAm FX market, according to Grados. “There has been some progress in new regulations for fintech companies but not much has done for e-FX/CFD retail brokers. In most of the countries such as Mexico, Paraguay, Peru, Colombia, Chile, Uruguay, Argentina and Ecuador there is no regulation for e-FX and CFD trading. Market commentators say that we may soon start to see progress with that for OTC FX and CFD players in the region but for now the focus is on regulating institutional entities in the local centralised markets such as securities trading firms, banks, pension funds, hedge funds, and other non-leveraged financial institutions,” says Grados. “This is taking preference over creating a robust regulatory framework for decentralised markets which could offer some protection for the huge mass of retail forex traders and small investors from unscrupulous FX brokers.”
At an institutional level, regulation in LatAm has been both positive and negative, says Grados. “The demand for institutional e-FX is still relatively low due to regulatory rules, culture and policy restraints. Nevertheless, changes in culture, regulation and technology innovation are putting pressure on market participants to adapt. For example, pension funds and asset managers are now under pressure to prove better transparency and best execution,” he says.
Yet, many regulators in the region are wary of the greater adoption of e-platforms, citing potential job losses, jurisdictional issues over the location of data centres and pricing engines and the growing internationalization of FX leading to less control over local monetary policy, says Grados.
There are though, some regulatory and operational benefits that could arise from the greater adoption of e-FX platforms, says Grados, such as the demonstration of best execution pricing, better price transparency, and the implementation as well as greater cost efficiency in trade settlement and confirmation. So it remains to be seen whether greater adoption of e-FX platforms will be able to assuage regulators’ concerns.
Overall, says Grados, retail investors should focus on working with providers than can deliver a safe and effective trading environment that meets their needs. “Investors should seek advanced trading technology with real-time pricing, sophisticated charting tools, and efficient order execution capabilities to gain a competitive edge in the market. Effective risk management tools, robust security measures, educational resources, and mobile trading capabilities are also emphasized. Furthermore, diversification through access to global markets and a strong focus on customer support and service are considered essential for a successful e-FX trading experience in Latin America.”
“Traditional voice channels are no longer sufficient, and local participants without e-FX capabilities on a global scale will be left behind”
Jose-Antonio Buenaño
Looking ahead, we can expect the penetration of e-platforms and e-trading to extend beyond the main population centres in various ways, says Grados. “Emerging urban centers will become key hubs for e-trading growth, given their growing middle class and improved access to technology and financial services. Moreover, e-trading will outreach to rural areas, facilitated by improved internet connectivity and mobile penetration, bridging the geographical gap and allowing individuals in remote regions to actively participate in forex trading.”
Financial education initiatives will also play a pivotal role in expanding e-trading’s reach, says Grados. “As more people gain insights into trading strategies and financial markets, individuals from non-traditional financial backgrounds will enter the trading arena, fostering a more inclusive trading environment. Additionally, e-trading platforms have the potential to facilitate cross-border trading within the region. As regulatory frameworks evolve to support international trading, traders from one Latin American country can engage with markets in neighboring nations, broadening the scope of e-trading and promoting regional financial integration.”
In essence, the e-FX market in Latin America, especially on the retail side holds immense growth potential beyond the main population centres, says Grados. “The confluence of technology, regulatory evolution, and the pursuit of financial inclusion is driving the market’s expansion, creating a more diverse and vibrant e-trading landscape across the entire region.”
Digital FX solutions
Latin America is primed for significant growth in digital FX services due to its expanding global exports, rapidly developing internet and mobile connectivity, coupled with a large, young, and tech-savvy population, says Jose-Antonio Buenaño, Latin America director for Edgewater Markets. “Many regions are still underserved by traditional banking, making them ideal for digital solutions that offer greater access and efficiency. While countries with large remittance flows such as Mexico and Brazil are fairly digitized, over the next few years, we can expect to see the greatest penetration from the Andean countries, where the need for faster, cheaper cross-border payments are growing.”
Additionally, as more businesses in the region embrace e-commerce and international trade and funding, the demand for streamlined FX solutions will continue to rise further driving expansion in this space.
At the same time, the LatAm markets continue to evolve and develop their e-FX capabilities expanding their global reach by pricing new clients directly thanks to the use of tech firms that enable both large and mid-tier local onshore banks to access the global marketplace and to use technical development and credit intermediation services for clearing, says Buenaño. “This has implications beyond FX, also increasing the appetite for the LatAm fixed income products, as clients seek higher yields to counter the expected decrease in US fixed income yields, and overall equity market easing. With meaningful issuances scattered throughout 2024 and 2025, the global demand for local LatAm currencies will propel onshore local banks global importance for respective currency pairs. The regional hotspots that are emerging lie beyond Brazil, and now include the Andean region(Chile, Peru, Colombia), and perhaps Argentina will enter that mix by mid-2025,” says Buenaño.
A progressive regulatory environment would help to increase the demand for e-FX further and, although other regions are further ahead in this respect, the regulatory bodies of various LatAm countries are easing their restrictions in order to attract required capital raising flows, says Buenaño.
“In order to facilitate these offshore activities, local banks need to position themselves globally with an established e-FX service. As we enter a period of time where LatAm nations are seeking to raise significant capital through bond issuances, the regulatory bodies are being accommodating to their local banks in order to make liquidity in LatAm currencies more accessible. Traditional voice channels are no longer sufficient, and local participants without e-FX capabilities on a global scale will be left behind.”
The rapid digitalisation taking place across the continent coupled with increasing internet penetration is also having a positive effect on encouraging greater participation in e-FX trading, says Buenaño who agrees with Grados that the ongoing development of broadband access has had immediate impact on the LatAm community, providing the ability for traders and retail investors to reach the markets via mobile device and internet access.
“The value of electronic trading is becoming more apparent to the local FX community as the Latin American market continues to develop”
Paul Hopkinson
Mobile trading technologies are also heavily used across the region, says Buenaño. “The increased accessibility provides price transparency, which is always going to contribute to higher volumes and trust between customers and market makers, improving the democratization of FX trading. This is ongoing in Latin America now and a trend we see continuing.”
Cultural and demographic shifts
There are cultural and demographic shifts impacting the adoption of FX trading in the region. “As more and more of the LatAm nations seek funding from outside of the region, the more and more they need to be able to reach global participants. This has a dramatic effect, increasing their local currency volumes, forward exposure, and monetization of their existing inventory of currency holdings. In addition, regulators want these flows processed by local regulated banks. The expansion of currency volumes are the first steps to opening the currencies, which countries like Chile for example, are already working toward,” states Buenaño.
To compete in today’s markets requires local participants to scale their business through electronification, not only leveling the playing, but tilting it toward local banks, who have become the primary market makers for their currencies for the global community which has not always been the case, says Buenaño.
“Through one-stop shops like Edgewater, more and more local banks are able access technology, credit and distribution services to compete on a global scale. With more competition comes increased liquidity and spreads compressions and transparency, and with credit intermediaries, direct trading between participants can be achieved, further reducing traditional transaction cost,” says Buenaño.
“These technologies are enhancing market transparency, speeding up execution, and reducing costs, while allowing our clients to participate on a global scale. Digital solutions are also making cross-border payments more efficient, driving financial inclusion, and fostering economic growth for the region. We’re committed to leading in this evolving landscape, offering our clients the tools they need to succeed.”
As the LatAm market adopts various technology and electronic platform offerings, they are becoming sophisticated, and have a real need to participate electronically themselves, says Buenaño. “However, as each market behaves differently, there is no one size fits all, therefore the technology employed needs the flexibility to conform to specific local requirements and needs. In addition, technology providers themselves need to be conflict free, and able providing clients a holistic offering and interface to all third-party channels and not have channel conflicts.”
Institutional e-FX perspectives
The marked increase in the use of electronic trading in the institutional LatAm FX market is down to a number of factors such as changes in demographics, regulation and technology. There is also a desire to keep up with international markets, says Paul Hopkinson, FXGO product manager, Bloomberg. “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.”
“Despite the recent impact on the Mexican peso and the Brazilian real due to the unwinding of carry trade positions in Japanese yen, 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.
Mobile trading technologies are heavily used across the region
“As a result, demand for FX has increased and local banks are investing more in electronic trading systems in order to compete with global FX dealers, and adhere to national and international regulatory standards. 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.”
A number of factors are further influencing the development of the institutional FX market across Latin America albeit with differences amongst buy-side and sell-side participants, 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. 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,” he says.
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. In addition, 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,” says Hopkinson.
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,” says Hopkinson.
Looking to the future
In terms of the future expansion of LatAm’s e-FX market, the adoption of electronic trading in several countries in the region is already significant and will continue to grow, says Hopkinson. “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. 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,” says Hopkinson. “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 utilising a seamless, flexible, and intuitive platform to improve efficiency, reduce cost and mitigate risk.”
