Mumbai: With the Securities and Exchange Board of India (Sebi) looking at stricter norms to regulate high-frequency trades (HFT), leading algo trading system providers say the usage of this technology is set to surge in the country and be at par with developed economies.
HFT, also called “algo” trading in market parlance, refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade.
It is mostly used by large institutional investors.
According to experts, algorithm (algo) trades currently represent 35-40 per cent of the total transactions in the domestic capital markets – nearly half of the levels recorded in developed countries.
However, it is expected that India would eventually be at par with the developed economies with 80 per cent of the total stock market turnover expected to be through HFT by 2020.
“With time, all technologies get cheaper and available to mass markets, technologies that facilitate algo/ HFT would take that path as well,” uTrade Solutions founder and CEO Kunal Nandwani told PTI.
“We foresee that as Indian markets continue to attract global capital by 2020, the share of HFT in total transaction turnover would shoot up to match the benchmark of 80 per cent and above as in developed markets,” Mr Nandwani added.
Echoing similar sentiments, Symphony Fintech co-founder and CEO Praveen K Gupta said, “India is very fast in adopting any technology…usage of HFT and algo is unstoppable in India. It is bound to grow much more in short time.”
The rise of HFT has raised concerns in India with regard to its impact on market quality, financial stability and regulatory framework.
Concerned over the risks from such trades, market regulator Sebi is working on a set of norms to ensure fair opportunities to those without such latest trading technologies.
While noting that there were no market irregularities in the last four years that can be attributed to algo trading, Mr Nandwani said Sebi’s concerns around unfair market access and systemic risks to market stability “are valid”.
However, he added that these issues need to be addressed by understanding their root cause rather than “either banning or pressing the brakes on HFT altogether”.
“Through co-location of servers at the exchange premises, institutional players will reap the advantage of faster access to market information and hence facilitation of more efficient trade execution through the use of algo,” Mr Nandwani said.
“This differential market access comes at a price and hence should not be construed as unfair,” he noted. According to Mr Gupta, traders in a hurry to make money generally skip the part of sufficiently testing the algos in the realtime environment.
“In US, traders have easy access to design and test the algos before doing live trading,” he said, adding that India needs to keep enhancing the technologies ahead of time and ensure that processes are being followed.
In developed markets such as the US, the UK and Singapore, algo trades constitute over 80 per cent of the daily turnover.
“From a risk management perspective, the extant systems adopted by Sebi and Indian stock exchanges are as robust if not better than those in developed markets to handle complex algo trading strategies,” Mr Nandwani said.
The experts noted HFT trades gives higher possibility to make better money, though it also comes with higher expenses.
“HFT is an imperative part of stock market trading worldwide…it provides higher liquidity,” Mr Gupta said.
“The facility should be extended to other class of investors so that they are also allowed to make use of technology to minimise their losses, while maximising profits with discipline and scientific processes,” he added.
Going by estimates of uTrade Solutions, HFT turnover as a percentage of overall turnover in the equity segment has risen from 25 per cent in 2012 to 42 per cent as on date.
In the equity derivatives segment, the same has surged from 22 per cent to 56 per cent.
Under the pre-trade risk management system mandated by Sebi, every algo goes through exchange approval and thorough testing process which involves 13 risk checks done at different levels (trader, trading group, broker and client member) before any algo trade goes to the market.