Since the advent of Automated Trading in India, we have seen an unprecedented increase in volume at all exchanges. Market leaders of Indian Capital Market have adopted this new phase in the industry with open hands. But how successful has been this transition from Manual Trading systems to Automated Trading and what all are the different scenarios being faced by market players. This article gives a brief glance at the Indian Buy/Sell-Side perspective of Automated Trading.
Guptaji has just had his dinner when he receives a call from the owner of a big broking firm. The talks are about how the server has to be upgraded at the exchange co-location. Previous up-gradation was just a month back involving massive order size running into 100,000 Dollars. But Guptaji is not surprised. This has been a trend for the last one year. This broker, like most Tier 1 brokers in India does High Frequency Trading (HFT). Latency is supposed to be between 100-300 Micro seconds to get the best deal. So, you need to have the best co-location and most powerful servers.
In US nearly 60-70 % volume is generated by HFT and in India it is widely speculated to be around 25-30 %. Due to this surge, many foreign ATS vendors are entering Indian Market. Some of the well known vendors providing platforms for HFT in India are Omnesys, Apama,
RTS etc. and many like Horizon, Orc, SimCorp, Linedata contemplating.
However, not all Automated Trades in India are HFT. Another breed of Broker is adopting a different path altogether.
Non-High Frequency Trading:
Most non-HFT algorithmic strategies aim at minimizing the market impact of (large) orders. They slice the order into several smaller child orders and spread these child orders out across time (and/or venues) according to a pre-set benchmark. (Peter Gomber et al,
2011). These strategies also include complete automation of technical analysis based strategies.
For e.g. A broker trading with a strategy developed over AmiBroker or similar tools can connect it to Third party Algo Trading System and automate the whole process.
Many brokers are already using different well known products like Apama, FlexiTrade, Sungard, Symphony-Presto, RTS etc. and approaching exchanges to get their respective strategies approved. This brings us to the grievances of Buy/Sell-Side regarding Automated Trading in India.
Also, for brokers offering Algo Trading to Sub-brokers please go through this quite informative thread started in a forum called Traderji where traders of India discuss day to day life etc. ClickHere
Issues faced by Sell-Side/Buy-Side:
Bells of the flash crash on 6 May 2010 in the US were heard in India as well. Securities and Exchange Board of India (SEBI), central regulatory body, decided it is better to bell the cat. If that was scary for SEBI then case of ‘faulty algorithm’ which caused unusually large trades on BSE during its Muhurat trading session a few months ago would have given them a heartache.
These are some of the reasons why SEBI is so apprehensive regarding Algo Trading and was very close in banning Algo trading altogether. Some of the regulations (there are quite a few but let’s just discuss the main pain points) that Indian Buy/Sell-side has to follow are:
a. 200,000 Rs should be paid to respective exchange for Algo Trading Permission under in-
b. Every Algo Strategy has to be shown for approval to exchange with all the Risk Management
c. This whole approval process takes around 3-4 weeks.
d. If during trading any error occurs penalty is absurdly high.
e. The regulation keep on changing, recent was the FMC one.
Most brokers disapprove of these regulations since it slows the deployment of new algorithms and also involves revealing trade secrets. So, if we go through all the time and money involved in Algo Trading, Indian Brokers are doing a fabulous job in adopting this technology.
Another side of sell-side firms came up recently during Trade Tech 2012 Mumbai. A large broker offering Automated Trading emphasised on the need for more regulations with regards to Risk management System. This unprecedented comment where a regulated body is asking for more regulations shows that even Indian Broker community has not yet found Automated Trading completely safe.
Still, Automated Trading Market in India is looking quite encouraging and even after so many hindrances, we are quite sure that it will flourish at an incredible rate.