The increasing use of automated trading by brokerages has spelt the death knell of manual arbitrageurs. The superior technology has compelled several firms indulging in manual arbitrage to shut shop or scale down their operations. What?s more, arbitrage margins for firms using algos have shrunk as automated trades have reduced spreads.
?As spreads narrow, it will become increasingly difficult for manual traders to find arbitrage opportunities,? said Prasanth Prabhakaran, president ? retail broking, IIFL.
Added Richard Bentley, industry VP ? capital markets of Progress Software, which provides tech solutions to broking firms: ?It?s only natural that the spread between prices will narrow as automated trading reduces market inefficiencies.?
As the requirement for manual arbitrage declines, many manual arbitrageurs and jobbers are getting laid off, say industry observers. Many more are likely to lose their jobs going forward. ?About 20 people trained in algo trading can do the work of 200 manual traders,? said Anshuman Jaswal, senior analyst, Celent Securities and Investments.
Arbitrageurs exploit price differences in scrips, while jobbers buy and sell securities rapidly to make small profits. Algo traders use algorithmic programmes or formulas, while manual arbitrageurs have to physically look for buy and sell opportunities.
Interestingly, apart from large brokers, prop desks of smaller firms and even startups have tried to latch on to the opportunity for automated trading in the past few months. This heightened activity in the arbitrage space, however, has reduced spreads and impacted margins of algo arbitrageurs, say industry observers.
According to Amit Gupta, chief manager ? research, ICICI Securities, arbitrage trades are now executed if the spread between cash and futures market is about 80 basis points, as opposed to 100-plus basis points earlier.
?Arbitrage opportunities will remain but the time frame for a particular arbitrage opportunity has reduced,? said Jaswal. According to him, firms will now have to tweak their algo models almost every month as competitors are likely to develop similar algorithmic programmes in that interval.
With the decline in spreads in plain vanilla cash-futures arbitrage, firms are now exploring arbitrage opportunities in the options segment. ?Trading in options is one of the main drivers of algo trades now,? said Jaswal. And in a bid to establish the competitive edge, firms are now racing ahead to develop algorithmic programmes that are not entirely risk-free. ?Both the algos and the kind of arbitrages being executed are becoming more complex,? said Jaswal.