Mexico: A key focus for emerging market traders
Navigating Mexico’s equity market, where liquidity is sparse and intra-day volatility high in small and mid-cap names, can be challenging for emerging market traders.
Within the MSCI Emerging Markets (EM) Index, Latam accounts for just over 7% of the index while Mexico contributes 2%. As the second-largest market in the region, it is of particular interest for any trader with Latam exposure. However, like most emerging markets, the Mexican equity landscape is fraught with complexities that demand both strategic insight and a careful approach to execution.
The significance of high volatility and illiquidity
Emerging markets are inherently volatile and Mexico is no exception. For traders, this means rapid price swings that can either create opportunities or impose significant risks. The high touch nature of the market can exacerbate these issues, making execution more difficult and exposing participants to latency costs and potential information leakage.
Unlike major developed markets, Mexico has a relatively small universe of publicly-listed stocks. The majority are small- and mid-cap equities, limiting liquidity for institutional traders. Furthermore, listed companies can be majority-controlled by family ownership, restricting the available free float and making sizeable trades more challenging.
As a result, traders must navigate varying liquidity conditions and execution speeds, requiring a tailored approach to order management.
Sourcing block liquidity
Given the challenges presented by Mexico’s market structure, algorithmic trading has become a viable tool for traders seeking more efficient execution.
Of course, by automating order handling, algo strategies streamline execution, reducing the reliance on high touch trading that can be slow and costly. Additionally, algos dynamically respond to market conditions, ensuring that orders are executed at the most favourable bid-ask spread when liquidity arises.
Innovations in execution algorithms now incorporate real-time analytics, helping traders adjust their strategies based on liquidity shifts. Machine learning-enhanced algorithms refine execution paths, continuously optimising performance as market conditions evolve.
However, while algo trading is important, not all algorithms are created equal and access to liquidity remains a critical component of successful execution in the Mexican equity market.
This is where Liquidnet offers a distinct advantage. With an established global presence in 57 markets, Liquidnet has developed a deep focus on emerging economies, having been at the forefront of trading technology innovation for over 20 years and continuously refining execution strategies. That continues with providing block liquidity in Latin America, specifically Brazil and Mexico.
Additionally, its significant buy-side network, arguably one of the largest with over 1,000 firms, provides exclusive access to liquidity opportunities in Brazilian and Mexican equities that are not available through conventional channels. For example, in March, Alsea de CV Ordinary Shares traded on Liquidnet at 233.6% of their 10-day average daily volume (ADV), underscoring the platform’s unique liquidity advantage. On average, Liquidnet Members enjoy sourcing block liquidity in these markets well above 10% ADV on a given print.
By integrating cutting-edge algos with access to unique dark liquidity pools, Liquidnet enables traders to execute large trades efficiently while mitigating the challenges inherent in Mexico’s market structure. This combination ensures that institutional traders can operate with confidence, securing optimal execution while minimising market impact.
The future of trading in Mexico and Latam
As Latam continues to evolve within the global financial landscape, Mexico remains a pivotal market for emerging market traders. While the challenges are significant – ranging from volatility and illiquidity to transparency concerns – technological advancements in algorithmic trading and access to deeper liquidity pools provide viable solutions.
For traders looking to navigate these complexities, a combination of sophisticated algos and strategic liquidity access, such as that offered by Liquidnet, is crucial. As the market landscape shifts, leveraging these tools will be essential to maintaining a competitive edge and achieving execution efficiency in one of the world’s most dynamic emerging markets.