?Speed @ thought? is set to be the new norm for Indian bourses. Co-location facility, which allows quick execution of equity trades, is fast gaining popularity among brokers.
Indian bourses could pip global exchanges, including that of the UK and Australia, to become the second fastest after Nasdaq, which is known for its lowest trade execution time.
Netmagic Solution MD & CEO Sharad Sanghi said, ?Currently, algo trade as a percentage of total trade in India is much lower as compared to developed markets.? All that is set to change soon, Sanghi said. BSE’s technology partner in offering co-location facility. TS Harihar, co-head-institutional derivatives at ICICI Securities said algo trade is expected to increase to 15% of the total equity trades in a few months time from the current 5-9%.
Algo trades are a form of high frequency trade (HFT) done through computers without human intervention. ?Automated(or computer-based) trading is what every broker is focusing on,? Harihar added. Morgan Stanley, Goldman Sachs, Citi, Deutsche, Motilal Oswal and Edelweiss Capital are already into HFT.
National Stock Exchange (NSE), which already has approved 2,500 algorithms (algos) till date, is increasingly getting new algos for approval from market participants. The two domestic stock exchanges are scaling up and introducing cutting-edge trade engines.
NSE, which is already offering co-location facilities, plans to introduce a modified trading engine, which will enable it to handle a trade at fraction of a millisecond. One millisecond is 1/1000th of a second. Currently, NSE trade engines handles 20,000 information a second, which would rise to 1 lakh a second by year end. Bombay Stock Exchange (BSE), which plans to launch co-location facility from November, wants to lock horns with its rival by matching its trade execution time. The co-location server facility basically allows a broker to place his or her server in the same place as that of exchange?s trading engine, enabling faster access to order book data provided by the exchange.
Globally, asset managers such as pension and hedge funds prefer brokers with co-location facilities. In fact, early this year, when Brazilian stock exchange BM&F Bovespa offered co-location facilities, it sold out quickly. In India too, when NSE offered 100 racks for co-location, most were sold out and 60 of them are running live today. BSE, which is offering 80 racks, has received encouraging response from at least 50 brokers.
Giles Nelson, chief strategist at US-headquartered Apama Progress Software, said the time is ripe for India to get into this level of sophistication. ?The US and Europe are much sophisticated and advanced with almost 60-70% of equity trades accounted by HFTs.? With greater sophistication in developed markets, which also reduces bid-ask spreads and arbitrage opportunities, the next opportunity for investors lie in emerging markets, including India, analysts said.
Experts reckon that there is almost a 1.5?2% savings in share-buying costs for investors on implementing ‘execution Algos’ like time weighted average price (TWAP) and volume weighted average price (VWAP). TWAP and VWAP are the most popular algos used in India. Algos are either execution-based or alpha generating. While the former comes into picture on executing transactions, the latter is used in quant-based fund management.
Though India has just started experimenting with HFT, Nelson sees huge growth potential for such trades in India. ?Multiple exchanges and sophisticated market structure have existed in India for quite some time? He added that the average daily volume on NSE is already 10 times that of London Stock Exchange (LSE) and is among the top five exchanges globally. Also, with smart order routing soon becoming a possibility, it is believed, pricing is likely to get more efficient, in addition to boosting volumes at exchanges.
While the market participants are gearing up for HFT, globally there are sceptics. The latter, for instance, blame HFT as the sole cause for the flash crash on May 6 in the US, when Dow Jones swung 1,000 points. Besides volatility and creating systemic risk, HFT is also argued to benefit institutional investors more than retail investors. For the moment, the regulator Sebi is treading with caution.
It has constituted a technical advisory committee to recommend measures for improvements in market structure as well advice them on framing appropriate policies.