SAO PAULO Direct Edge Holdings LLC, the fourth-largest U.S. stock exchange operator, plans to apply for a license to operate a Brazilian bourse in "a matter of weeks," a senior executive told Reuters on Tuesday.
If Brazilian regulators approve the application within the legal 180-day limit, that could give BM&FBovespa SA (BVMF3.SA), Brazil's sole financial exchange operator, its first major competitor in Latin America's largest equity market.
Executives at the Jersey City, New Jersey-based firm are "putting the final touches" to the application, said Anthony Barchetto, Direct Edge's head of strategy. The company still believes that the best option for clearing, registration and custody services would be renting them from BM&FBovespa.
The plan is part of Direct Edge's efforts to grow outside its home turf in markets with high growth potential and robust trading volumes. News of Direct Edge's plans drove shares of BM&FBovespa down as much as 2.7 percent as the application fanned concern the São Paulo-based exchange operator's dominant position could be challenged.
"We are very glad with the CVM's willingness to accept our application," Barchetto said in a phone interview, reiterating that Direct Edge plans to base its Brazilian operations in Rio de Janeiro, the country's second-largest city.
Under current rules, BM&FBovespa enjoys a near monopoly on all trading, clearing and settlement services for most locally-traded shares. While depositary receipts in New York or other global financial hubs provide a possible alternative to trading on BM&FBovespa, many investors cannot trade them due to legal or tax restrictions.
Furthermore, there are no legal rules in place requiring BM&FBovespa to sell or rent clearing services - a strategic part of any trading business requiring a huge investment of time and money.
Chief Executive William O'Brien said in July that Direct Edge does not rule out working with separate trading and post-trading platforms in case talks with BM&FBovespa over sharing clearing services fail.
An independent study on competition in the market structure industry commissioned by the CVM last year found that lack of competition is unlikely to cause harm in the medium-term. It proposed a self-imposed regime of price monitoring and benchmarking by BM&FBovespa, incentives to improve access to BM&FBovespa's clearing, and ways to enhance market supervision and regulation.
Direct Edge is owned by a consortium that includes the International Securities Exchange, Citadel Derivatives Group, Goldman Sachs Group Inc (GS.N), and JPMorgan Chase & Co (JPM.N).
(Reporting by Guillermo Parra-Bernal; Editing by Gerald E. McCormick and Andrew Hay)