The share of algorithmic trading in the cash market touched a new peak in June 2013 as brokers upped the use of these complex automated trades to benefit from an increasingly volatile market.

Last month?s data from stock exchanges showed that algorithmic trading accounted for 39.2% of the total cash market turnover on the BSE and the NSE last month. This is the highest since algorithmic and high frequency trading (HFT) was allowed by the Securities and Exchange Board of India (Sebi). Algorithmic trading on the BSE alone contributed 19.50% of total cash market turnover in June ? the highest ever, data showed.

In addition to a weakening rupee and concerns over a ballooning CAD, the fear that the US Federal Reserve will start to wind down its quantitative easing programme has resulted in significant volatility in global markets, including India. As a result, foreign institutional investors (FIIs) sold Indian equities worth over $2 billion last month.

?The fear was so intense. FIIs pressed the exit button and sold $2 billion of Indian equities in 12-13 sessions straight. Much of the selling happened through computer applications using algorithms as it is efficient and increases the success of executing the order,? said an institutional desk dealer of a foreign brokerage house, requesting anonymity.

Algo trading is simply the use of computer programmes to execute trades in the stock markets or other financial markets. These programmes execute trades as and when pre-set defined parameters such a price, timing and quantity are triggered. For instance, a software code can execute a buy and sell order in a few milliseconds when certain price parameters are triggered. Also, the volume can be set and the whole transaction executed without any manual intervention. Complex trading strategies can also be implemented using algos.

Apart from algo-trading, orders handled by smart order routing (SMO) and direct market access (DMA) touched historic highs. For instance, trades executed using SMO stood at 1.67% of turnover on the BSE last month. DMA turnover stood at 0.07% of the total market turnover and close to an all-time high of 0.12% in November 2012 as stock markets became volatile.

As per Bloomberg data, India VIX or the volatility index, on the NSE had spiked to a 52-week high of 21.79 in June. The gauge is an indication of near-term market volatility based on the Nifty 50 index options prices and is used to measure prevailing and upcoming risks in the market.

As the quantum of algorithmic trading picked up, the RBI highlighted the risks attached to such trading mechanism in its June 2013 Financial Stability Report and highlighted the need to have in place a proper regulatory structure and continuous monitoring of regulatory systems that would avert operational risks and other risks posed by algo trading and high frequency trades (HFTs) which are based on a similar mechanism.

?Even as the risks from HFT specific to the segments of the market are being addressed, the nature of the HFT and the associated risks are undergoing a transformation due to innovations like ?big data’,? stated the RBI report. RBI defined big data as any large or/and complex data sets which cannot be efficiently managed with the standard software tools.

According to RBI estimates, algo-based trading accounts for 14% of cash market turnover in Indian exchanges against 80% in developed markets like US, Europe and certain Asian countries like Singapore and Hong Kong.

Even as regulators remain concerned over risks of using algorithmic trading, experts say regulators cannot take a step back. Algos and DMA are international products and their use is largely demanded by FIIs.