Grupo Financiero Banorte, commonly known as Banorte, is the second largest financial group in Mexico and one of the largest institutional brokers on Mexico’s two stock exchanges, BMV and BIVA.
Traders Magazine met with Bruno Alberto Grebe Martinez, Executive Director, Capital Markets at Banorte, and Jorge Ignacio Lagunas Cortes, Director of Capital Markets Promotion at Banorte, at their Mexico City office on March 6. The discussion covered Banorte’s equity trading capabilities, the equity trading landscape in Mexico, and the evolution of the Mexican equity market.
(This interview has been edited for length and clarity.)
Briefly describe your roles and responsibilities at Banorte.
BRUNO GREBE:
I manage the equity desk, which is composed of three main businesses.
First we handle the retail orders from our private banking group, which includes execution and arbitrage. Second, we have a proprietary position that I also manage which consists of a prop trader who sits outside our desk.
And we also have institutional sales which consists of two businesses – we take care of clients in the US and abroad, and we take care of our local institutional clients, mainly pension funds or afores, mutual funds, and insurance companies.
JORGE LAGUNAS:
Pension funds are about 90% of the institutional market here in Mexico. In terms of size, mutual funds and afores are about 40% of the GDP of Mexico. So it is a huge sector.
BRUNO GREBE:
Jorge is in charge of institutional sales in Mexico, which is about 70% local and 30% international.
The mix has changed over the years. It used to be around 80% international, but commissions from the international institutions get smaller every time, so we’re trying to do more to take care of the local guys. We have the advantage of being a big bank, so people want to trade with us in order to settle and manage the risks that matter to the institutions.
What markets do you trade?
BRUNO GREBE:
We trade equities in Mexico and the US mostly.
It’s about 60% international and 40% national. For international it’s about 90% US and 10% in other countries.
JORGE LAGUNAS:
Over the past five or six years the US market has performed better than other markets, so we’ve seen the retail base on the private bank side trade more in the US.
BRUNO GREBE:
There’s a parallel market in Mexico, which is comprised of US companies. We bring in stocks from the US and convert them into pesos, and then you can buy, for example, Apple stock in Mexican pesos. This is done on the International Quotation System, or SIC (Sistema Internacional de Cotizaciones). The exchange has a clearing member in the US, so when a client trades Apple or any other US name here in Mexico, we settle the trade with the custody from the Mexican exchange to New York.
We can list anything that is listed in the US, except for Bitcoin or cannabis.
There are more than 1,000 US names listed here. We also trade ETFs and UCITs from London. We can trade all over the world.
What are your primary challenges as a broker, in terms of getting best execution for your clients’ trades?
BRUNO GREBE:
We have two exchanges in Mexico – the Bolsa Mexicana de Valores, or BMV, and Bolsa Institucional de Valores, or BIVA. In order to comply with the regulations in Mexico, we have to trade on both exchanges, and that can take out some opportunity in the secondary market, because I don’t think the Mexican market is big enough for two exchanges. If we send 10,000 shares to an exchange, we might get executed only 3,000, and we have to handle the rest in order to get the best execution for clients.
A second challenge is that Mexico does not have many names that are interesting to Mexican investors right now and there aren’t many IPOs. This is why we’re focusing on bringing them different opportunities, like US- listed names that have a lot of volatility, or investments in Canada or Europe.
JORGE LAGUNAS:
In terms of trade execution, the local institutions are growing a lot in terms of assets, but they need to do more electronic trading, and we as a broker need to help and support them in this area. With the most of the afores and funds it’s still about taking a call and doing a trade manually which means giving the trade order to the desk. So this is a challenge but also a great opportunity to do more electronic trading, which reduces cost and time.
How much of your trading is manual / high touch, versus electronic / low touch?
BRUNO GREBE:
Retail is basically high touch. US customers are pretty much all electronic, low touch. We have direct market access (DMA) connected through us, and we have another local client that trades very low touch.
But as we mentioned, institutions in Mexico give you the order by phone. We are trying to move this to electronic trading through some different channels that we have, like BlackRock’s Aladdin order management system (OMS).
JORGE LAGUNAS:
Today our mix is maybe 70% manual trading and 30% electronic. But it’s important to note that even for electronic trades, clients in Mexico need to call to place the order, because the regulators require this.
What do you use for trading technology and how do you work to keep improving your systems?
BRUNO GREBE:
For retail we have used a system called TAS for many years. But we are moving to Lumina Order Management, which is what we use on our desk and is the provider of our OMS. We’re trying to have all systems through one provider, which is why we’re moving retail to our platform.
For trading algorithms we use FIS, Fidessa and Tradeware.
JORGE LAGUNAS:
For connectivity we have NYFIX. We have a dedicated channel to Houston, and then to New York, where our low touch clients get connected.
What is the importance of relationships and technology and how do they work together?
BRUNO GREBE:
Technology is one of the main issues now, because even if you have a very good relationship with the client, if you don’t have the technology they will trade with somebody else. Banorte is well-positioned as a broker, because we can provide all the different trading platforms the client needs, and we have algorithms, FIX connections, and direct access. All of our systems are interconnected and work well, and we’re very fast on low-touch orders.
JORGE LAGUNAS:
Technology means everything for top brokerage houses. The competitive environment here in Mexico is very hard – there are 32 brokerage houses, 10 Afores, and 30 mutual funds. That’s 40 institutional clients for 30 brokerage houses. So you need the technology and you also have to provide value in terms of research, news, ideas, and more every day.
How are Mexican markets evolving, and what are the main differences between trading in Mexico and trading in the US?
BRUNO GREBE:
The main difference is liquidity. We have little depth in the market. So if a venture fund wants to buy $100 million in Mexican stocks, that probably will move the stock market 1% or 1.5% higher. This lack of liquidity is why more clients are trading abroad.
For evolution, in 1998 the stock exchange changed to electronic, and since then everything has been improving in terms of technology and speed. But the main issue is liquidity and a lack of new issues.
JORGE LAGUNAS:
There might be one IPO per year in Mexico. If the Afores are growing their assets by 10% per year, those funds have to be invested somewhere, so it goes abroad.
Another challenge is that the stock float in Mexico is very low. The average is around 15% or 20%, where it’s 95% or more in the US.
What does the future hold, both for Mexican markets and for Banorte?
BRUNO GREBE:
As we mentioned we’re shifting more of our focus to local institutions, because for us it’s better to take care of these guys locally than the US guys that trade for very little. We’re trying to broaden the list of Mexican clients, while obviously not forgetting about the US guys, because they are important as well.
JORGE LAGUNAS:
In Mexico, there is a very low number of clients with brokerage accounts relative to the overall population. Investing in stocks or ETFs for long-term savings isn’t really part of the culture. But it’s a great opportunity for the industry. Other countries in Latin America have more brokerage accounts than Mexico, even with lower populations. So it’s a good challenge and also an opportunity for broker associations here in Mexico to promote the market for investors. It’s an area where we need to evolve.
BRUNO GREBE:
The authorities have changed the rules and lowered the requirements for companies to list in Mexico, which is good. But there’s still little interest from companies to get listed, because they would have to report quarterly results, and if the float is low the stock still won’t trade much.
Any final thoughts?
JORGE LAGUNAS:
The manufacturing and technology industries in Mexico are growing fast. I think the financial system has to go in the same direction. It’s a great opportunity for investors, for brokerage houses, and for banks, to move the industry forward.
