Argentina’s share market bets on high-frequency traders
Inclusion in MSCI index also seen as likely boost to volume on stronger foreign demand
That there are misgivings towards high-frequency trading in an economy as crisis-prone as Argentina’s is no surprise.
But a bid to promote “algo” trading and HFT — a computer-driven trading technique that relies on mathematical models to capture differences in the price of securities — is part of mixed bag of efforts by the government of President Mauricio Macri to deepen Argentina’s tiny stock market.
“The idea is to use the IT sector to disrupt the capital markets in Argentina to increase trading volumes, which is definitely needed,” says Frank Thermitus, managing director of the Algorithmic Traders Association of Argentina (ATAA), pointing out that Argentina’s stock exchange is just a fraction of the size of those in the rest of Latin America’s big economies.
Convinced of the benefits of merging Argentina’s financial and technology sectors amid a growing global demand for fintech programmers — JPMorgan is establishing a technology infrastructure hub in Buenos Aires, for example — the ATAA is offering advanced training for students from a five-year government initiative that aims to teach coding and programming to 111,000 young Argentines free of charge.
Mr Thermitus highlights the success of India. In just five years, trivial levels of algorithmic trading in India surpassed all other developing countries, growing to around 40 per cent of all trades, compared with around 80 per cent in the most developed economies. “Like India, Argentina has a strong IT industry that could help it to emulate the growth of India’s capital markets,” he claims.
The attempt to introduce algorithmic trading — whose disruptive potential in the financial world has been likened to that of US tech giant Amazon in retail — is part of broader efforts by the government to expand Argentina’s capital markets, which also include legislation already passed by the senate that is expected to be approved by the lower house this month.
The new laws would ease regulations on foreign investment, restrict government intervention in companies and includes a new financing scheme for SMEs. Many highlight the importance of the removal of a ban on short selling, and the strengthening of the securities regulator’s ability to prevent fraud through disclosures and auditing.
But Mauro Roca, managing director for emerging markets at TCW, a US asset manager that oversees $202bn, argues that the “next big event” will be the expected restoration of Argentina’s status as an emerging market by MSCI, the index provider. Argentina was downgraded to “frontier market” status by MSCI in 2009 when the previous leftist government introduced foreign exchange controls.
A new wave of demand from institutional investors currently prevented from investing in frontier markets would lift liquidity in Argentina, with some analysts estimating that it could bring in new equity flows of around $5bn to the benchmark Merval index, which is today worth around $33bn.
For Mr Roca, Argentina’s market is still too “embryonic” for HFT to take off, with the market capitalisation of its stock exchange worth less than 12 per cent of gross domestic product, compared with 42 per cent in Brazil and 86 per cent in Chile.
“At the end of the day what really provides liquidity to the [stock] market is having a stable macroeconomic backdrop, more than issues on the technical side,” says Mr Roca.
“We need to see an improvement of the fundamentals and, above all, that any improvement is irreversible — that is, that the country is moving to a different equilibrium. Argentina is heading in the right direction, but it’s going to take some time,” he adds, suggesting that it could take three to four years for inflation to fall to single digits and for balance to be restored to the fiscal deficit.
Meanwhile, Miguel Kiguel, an economist and former undersecretary of finance, points out the concern that algorithmic trading would bring more volatility. “I don’t think it is a priority for Argentina right now,” he says.
Even so, Mauro Cognetta of Guadarti Torti, a local broker in Buenos Aires], is upbeat about the potential impact. “If the government’s plan to train 111,000 Argentines [in coding and programming] is fulfilled, even if it’s just half that, it would be a significant change,” he says. “If the [ATAA’s] the ambitious plan is successful, it will improve the market in terms of greater liquidity, volume and number of participants.”