“The Bovespa is like the CBF [Brazilian Football Confederation] and the brokers are like the clubs: the former is very rich and very powerful, while the latter do all the work and are going broke.”
Ricardo Lacerda, founder and CEO of BR Partners, uses this simile in an interview with Euromoney about the development of his business model. He is explaining why he closed down his nascent equities desk shortly after launch. Essentially, he says, he soon realised that the ECM business was not going to make a profit, and rather than have the other areas of the bank subsidise it for the sake of being able to claim a full-service capital markets platform, he shut it down.
“It was a tactical move; we couldn’t afford it,” says Lacerda. “We looked at the capital we would need to invest, somewhere between one third and one quarter of all capital, and with no certainty of return. It was an easy decision to make.”
Part of the problem is clearly macro – equities in Brazil are an underdeveloped asset class for a variety of reasons, but largely because the risk-free rate is so high (assuming overnight sovereign credit is such). Selic (the short term interest rate) is currently 14.25%, so pension funds hit actuarial return targets by buying the CDI (interbank deposit), or tax-free products that have virtually no credit risk, or market or liquidity risks either.
The BM&F Bovespa, say disgruntled brokers, is exacerbating the problem. Maybe it is the sight of the exchange reporting an operating margin of 64.1% in the first quarter of the year, while very few stockbrokers, or corretoras, are turning a profit, that is leading to such disquiet.
“The [Bovespa’s] margin is huge, and it controls clearing, trading and everything – it’s not like in the US or London where it is separate,” says one trader, who declined to be named publicly. “It is a total monopoly, and the exchange is making so high a margin at a time when the broker-dealers are completely dehydrated. That’s why you see a lot of them closing. There are about 60 corretoras and only a very small number are in the black – everybody else is in the red.”
For the full story read Euromoney’s September issue