Someone who works for a bank told us an interesting story the other day.The amount of liquidity in the Brazilian market jumped a lot recently — and he thinks there’s a simple reason why.
A number of hedge funds, one of which is Jim Simons’ quant fund Renaissance Tech, he says, opened offices in Brazil recently and began high frequency trading (HFT) operations.
Our tipster says that since funds have opened up shop in the BRIC country, there has been a significant increase in the amount of liquidity traders see in the Brazilian stock market.
All of a sudden, he says, the amount of liquidity in the market in Brazil jumped. And it’s because of hedge funds like RenTec are cranking up the amount of high frequency trading that takes place there.
Of course everyone’s trading in the Brazilian market (and many emerging markets) right now, but not everyone is opening up offices in Brazil in order to high frequency trade in the Brazilian market.
It seems like hedge funds satellite offices are popping up down there for a few reasons. One is that Brazil is one of the “BRIC” emerging economies that are surging right now. So, obviously hedge funds would be interested in finding investments in the country.
Another is that a physical location in Brazil allows high frequency traders to “co-locate” their servers near the Brazilian exchange. The closer a server is to an exchange, the quicker the trade executes. HFT is at least 50% about “latency,” or speed and being the quickest to trade. (So basically, if you want to HFT in the Brazilian market competitively, you have to have an office down there.)
Also, the U.S. market has become overrun with high frequency traders, which are said to comprise up to 70% of market volume. The more people HFT successfully, the harder it is to gain an edge, partly because everyone tries to jump on the same trade.
Whatever the reason, what’s interesting is that RenTec and other hedge funds have opened HFT offices in Brazil and that their impact is so huge on the market that there was a noticeable change in liquidity, and traders in the U.S. noticed.