One of the regions that brokers are increasingly targeting is Latin America. Exness has an office in Uruguay. XM has an office in Uruguay but pretends it doesn’t. Pepperstone is in Chile. And a bunch of other people are in Mexico and Colombia.
But Brazil sticks out as a market you’d assume brokers want to do business in. It has the largest population in Latin America and the biggest economy. There are plenty of people with decent levels of disposable income and more than 140m have access to a smartphone.
“Anecdotally we definitely see interest [in Brazil] increasing,” said Martin Calvert, Marketing Director at ICS-digital. “I think the regulating process with sports and casino actually has potentially had an impact as investors, affiliates and platforms in that sector often speak with and influence people in the trading industry.”
Like other emerging markets that have superficially attractive features, Brazil has been a trickier jurisdiction to operate in, primarily because of regulation and payments.
With regard to the former, only two brokers that I’m aware of have any kind of licensing in the country – Saxo Bank and ActiveTrades. However, these licenses do not actually permit them to offer OTC derivatives. This is one of the nuances of the market, where Braziians are allowed to open accounts abroad but brokers cannot market directly in-country.
“Forex trading is permitted for Brazilian investors,” 4XC Founder Joao Monteiro told TradeInformer. “What is not allowed is to solicit traders locally. So all business has to be done via reverse solicitation like in other jurisdictions.”
The result of this is that companies have to be careful and clever about how they go about attracting clients, with the regulator being quite active in listing companies that it believes are breaching regulations.
“Tickmill does not do any marketing or make any kind of public offering in Brazil,” Tickmill Country Manager Brunno Huertas said. “We just onboard clients when one of them recommends us to someone else. All our communications have the necessary disclaimers and we have legal opinions from local lawyers about what we can and can’t do.”
Aside from regulation, payments have also been a big hurdle for brokers to overcome. Like other emerging markets, Brazil has had currency problems in the past and is thus not keen on the whole ‘liberal current account’ model. In part this is because the country had terrible hyperinflation in the early 1990s. It is also probably due to a kind of doom loop that the country is stuck in.
For reasons that are too boring to go into, Brazilian inflation sets in fast, even when economic growth isn’t that great. When that happens the central bank freaks out and starts rate hiking. The result of this is that the currency goes up in value because everyone starts doing a BRL carry trade. That makes exports less competitive, so the central bank starts cutting rates. Then you start getting growth but then that leads to inflation so the central bank starts hiking rates…you get the picture.
One of the consequences of this is that Brazil has not been an easy market to take money out of. It was also a heavily cash-based economy until comparatively recently. But as followers of the TradeInformer WhatsApp channel will be aware, Brazil’s central bank launched a new payments system – called Pix – in 2020.
Like India’s UPI system, this is actually superior to what’s on offer in most developed markets. The core benefit is that it makes sending digital payments very easy to do and transactions are settled instantly. It has also been widely adopted. More than 140m individuals in Brazil now use Pix and it’s common for over 150m transactions to be made using the system every day.
So having looked at that, this author figured it may make life easier for brokers. Has that been the case?
“Yes, it is much easier now to make local payments,” said Huertas. “It’s instant and 24/7, plus very safe. However, any type of operation which involves changing BRL to USD, in order to send the money abroad, must be reported to the Brazilian Central bank. This is where many brokers mess up. They partner with a PSP who does not understand the law, so you can imagine what can happen as a result.”
For 4XC, Pix has made taking deposits much simpler. Company founder Monteiro noted that it means local currency deposits can be made, which suits the end client, but that these are also received instantly, making life much easier for the broker. However, 4XC has gone further and managed to get a banking license in Brazil too.
“4XC applied for a banking license in Brazil last year, under the CarteiraX brand,” said Monteiro. “This way we could waive all deposit charges for Brazilian customers that wanted to invest in the FX market. That really made a big difference as we are the only brokerage, that I am aware of, with a banking license in Brazil to streamline payments for the other entities of the group.”
Payments and regulations aside, one of the things that this author sees often is brokers believing they can enter a market by throwing stuff at a wall and seeing what sticks. This is obviously not a very effective method as you can end up blowing loads of cash needlessly.
The main reason for that is there are local nuances in every market. That could be how people make payments or what assets they’re interested in. Others might be more random. For example, when this author was at a stockbroker we were told retail clients in Germany like to know exactly how they’re order had been routed, which was something only ADVFN-types in the UK cared about. So what mistakes do brokers going into Brazil make?
“You do not really see big brokers with a long-term plan and good strategy,” said Huertas. “There are a lot of small guys just trying to get clients at any price, so offering miracles like high markups to IBs, unlimited bonuses and so on. Brazil also has a language barrier for many international brokers. It is not easy to find Brazilians with good experience in the CFDs market. Sometimes, brokers just hire one or two Brazilians who worked in sales and ask them to start offering CFD instruments to the locals. That’s where brokers started receiving warnings from the watchdog.”
So there you have it friends. Brazil is a market you can do business in. And is seemingly a market you can do business in more easily than before thanks to better payments networks. Will anyone be going there next? Uruguay is pretty nearby…