Mexico’s Stock Market Monopoly Is About to Get Some Competition

New exchange seeks to boost trading volume by 50% in 3 years

BIVA would be first exchange competitor in four decadesBy Michelle F. Davis

(Bloomberg) — Mexico’s lone stock exchange is about to get some competition after more than four decades of operating as a monopoly.

In March, Central de Corretajes SA plans to start a new exchange from its offices nestled in a posh Mexico City neighborhood three miles (5 kilometers) to the west of veteran operator Bolsa Mexicana de Valores SA. The 29-year-old company, whose other businesses include a brokerage, says the new bourse will provide a jolt to what’s broadly considered one of the sleepiest stock markets among major developing nations.

The bet is that having two places to swap shares instead of one will lead to lower trading costs, which will deepen the market by drawing in more investors and freeing up capital for existing holders so they’re able to execute more sophisticated trades. Companies, seeing the bigger pool of available capital, will be more keen on tapping equity markets to raise money to build factories or buy competitors.

“We’re really interested in bringing liquidity because that’s what makes a market attractive to investors and it’s what generates better prices for companies,” said Santiago Urquiza, the chairman of Central de Corretajes. “And if there are more investors, then more companies will be interested in listing.”

BIVA, as the new exchange is called for its Spanish acronym, plans to distinguish itself from the entrenched veteran by offering anonymous trading, using auctions to determine closing prices and loosening requirements for companies seeking to list shares for the first time, according to Urquiza, a 60-year-old former currency trader. BIVA has also created a family of stock indexes for Mexico in partnership with FTSE Russell.

Urquiza, a Mexico City native, has been trying to change Mexico’s stock market for more than a decade. He’d heard the complaints from investors: There weren’t enough names to trade and the market was shallow. He thought having a second place to trade would help.

In 2003, he confided in Agustin Carstens, a college friend who was working at the time as a deputy secretary at Mexico’s Finance Ministry. Over dinner with a handful of friends in the capital, Carstens, who is now the manager of the Bank of International Settlements, told him it’d be a good idea to start a new exchange because it might help the market grow.

By the time he got around to proposing the idea again to financial authorities in the summer of 2013, his friend Carstens was governor ofMexico’s central bank. Authorities “responded really positively about the impact this could have on markets,” Urquiza said.

Urquiza formally solicited a concession to operate a new exchange in 2015 and in August, Mexico’s government approved the second bourse.

His goal is for the new bourse to help boost trading volume in the market by 50 percent in the next three years while expanding the number of publicly listed companies by 50 percent in five years.

Mexico’s stock market lags behind bourses of other developing countries in both sophistication and size: Only about 150 companies are listed and trading is thin among the majority of the names. The heavyweight investors of more developed stock markets — hedge funds, high-frequency traders and quants — are a rarity, and local regulations make it difficult to sell stocks short or engage in other derivatives trades.

The value of Mexican stocks represented about 27 percent of gross domestic product at the end of last year, according to data compiled by Bloomberg Intelligence. In Chile, whose economy is about a quarter the size of Mexico’s, the market represented 86 percent of GDP. Brazil’s stock market was 39 percent of GDP and about 450 stocks are listed. And while Mexico had the 15th-biggest economy in the world last year, its stock market was the 23rd-biggest by capitalization, according to data from the World Federation of Exchanges, cited in an Oxford Business Review report.

Perhaps not surprisingly, the Bolsa Mexicana dismisses the idea that BIVA is the answer to problems with equity trading in the country. Chief Executive Officer Jose-Oriol Bosch has said that opening a second place to sell stocks in such a small market will cause what little liquidity there is to dry up. Spokesman Roberto Gavaldon, in an emailed response to questions, reiterated the company’s position that BIVA’s arrival will “fragment the market” and bring about higher costs for brokerages and companies.

Others point to the fact that the new exchange plans to charge virtually the same fees as Bolsa for trading and market data, undercutting the idea that lower costs are going to usher in a slew of additional transactions. And then there’s the brokers guild, which has been grumbling about the upfront costs required to connect to two exchanges instead of one.

Larry Tabb, founder of Tabb Group, a New York-based firm that analyzes the structure of financial markets, says exchange competition almost always puts pressure on existing players to provide better technology at a lower cost, which makes markets more efficient.

“Just the act of creating a second place to go to find a stock creates competition, which then forces players to lower their pricing and create different pricing structures,” Tabb said in an interview.

There are already signs that anticipation of BIVA’s entry has brought about some changes into the market: The Bolsa Mexicana is considering adding REITs to its benchmark stock gauge, the S&P/BMV IPC, and tweaking its methodology to be able to include more than 35 stocks. Such changes would cause the gauge to look more like new FTSE-BIVA measure.

“The funny thing about competition is it forces people to innovate, which is a good thing,” Urquiza said. “We’re creating competition which attracts new players who want to see a more sophisticated market and it draws more volume from the existing ones.”

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