(Adds background, comments; changes dateline, previous MEXICO CITY)
By Gabriel Stargardter
NUEVO VALLARTA, Mexico, June 19 Mexico's stock exchange said on Thursday it will be connected to bourses in Chile, Colombia and Peru by year-end through the Latin American Integrated Market, or MILA, nearly doubling the size of the bloc.
MILA was formed in 2011 to boost market liquidity within the Pacific Alliance trade grouping, and the tie-up aims to create more business for the financial markets in the region.
"The Pacific Alliance will have in MILA's bourses an effective instrument of economic integration," said Luis Tellez, head of Mexico's bourse.
At the end of last year, the combined valued of the four countries' stock exchanges was $1.1 trillion, Tellez said.
According to the World Federation of Exchanges, Mexico's stock market is nearly as big as those of the three Andean countries combined.
MILA works, for example, by allowing a Colombian investor to buy shares in a Peruvian-listed firm using a broker in Bogota.
Countries maintain regulatory authority over their respective trading, but the ability to make the cross-border purchases increases volumes, a key component to attracting future stock listings by companies inside and outside of the region.
Experts say MILA should create a "virtuous circle" by lowering exchange costs, raising analyst coverage and clearing a path for investment to head to smaller companies.
Traders across the region, however, said that hurdles remain in order for MILA to live up to its potential.
"I think the project is still in diapers," said Gerardo Roman, head of stock trading at the Actinver brokerage in Mexico City, highlighting tax, currency and trading systems as key issues holding MILA back.
Roman added that MILA's success would also depend on the liquidity generated by larger institutional investors, such as Mexico's local pension funds, or "afores," which helped power a record year of stock offerings there in 2013.
The S&P MILA 40 index, which tracks the top 40 issues from the three Andean exchanges, is up more than 4 percent so far this year, while Mexico's IPC index has gained just 0.5 percent.
"As a bourse, (MILA) hasn't brought many benefits, in my opinion," said Daniel Ramos, a trader with Diviso Bolsa in Lima. "I think with Mexico it will be the same."
The announcement came as a Pacific Alliance summit kicked off in the western Mexican coastal state of Nayarit, near the beach resort of Puerto Vallarta.
The Pacific Alliance, created in 2012, is an economic bloc that includes MILA's members and represents about 35 percent of Latin America's gross domestic product. (Reporting by Gabriel Stargardter in Puerto Vallarta, Rosalba O'Brien in Santiago, Mitra Taj in Lima, Tomas Sarmiento and Alexandra Alper in Mexico City; editing by G Crosse and Steve Orlofsky)