The Gateway to Algorithmic and Automated Trading

India Rising

Published in Automated Trader Magazine Issue 37 Summer 2015

While high frequency trading levels in Europe and US seem to have plateaued, the converse is true for developing markets. At the same time, there is a shift in priorities, namely that it is no longer simply about scraping off microseconds. And while India's economy, along with investment interest, seems set for growth, its markets are adapting and preparing. Anna Reitman and Priyanjana Bengani report.

Sanjay Awasthi, Eastspring

India has made significant investments in the technology stack and risk management systems that go along with sophisticated electronic trading. Considering that direct market access was established in 2008, great strides have been made in the space of automated and high frequency trading over the last six years.

Eastspring Investments, one of Asia's largest fund managers, trades all emerging markets across a diverse range of asset classes. Eastspring has an eight-person dealing desk covering equities, fixed income, FX and derivatives. Consequently, said Sanjay Awasthi, a director based in Singapore, the firm faces extremely dynamic trading environments.

"India is one such market. The stock markets, its mechanisms and microstructure, have and will continue to develop as the economy evolves," he said.

India has a significant local arbitrage community that trades cash futures, and profits from inter-exchange arbitrage. It started off with local traders, but now there are an increasing number of prop desks at brokers and banks joining in, Awasthi said.

More asset classes are on offer too, such as FX and fixed income, particularly government bonds and interest rates.

Single stock futures meanwhile continue to be very popular. "The Equity futures market is roughly two-and-a-half times the size of the cash market. The majority of retail, a lot of speculative activity, happens in SSFs," said Awasthi.

Anybody trading India needs to be acutely aware, therefore, of how the relationship between cash and futures changes over various periods of time, he noted, adding that to trade these markets effectively means not only understanding them, but also remaining agile and adaptive to any changes or developments.

Floor to screen

One such development is the active courting of HFT firms by the two major markets, the NSE and BSE. Awasthi, who is a former regulator for India's markets watchdog, the Securities and Exchange Board of India, said: "Being a large fund house, liquidity is a main concern for us. Any measure that enhances liquidity is great, provided it is adequately regulated and everybody is kept at par."

India has not "even come close to" having the same problems with HFT as developed markets, and he sees more and more institutions, both domestic and foreign, actively using algos in India.

"We are also seeing a few brokers increasingly localise their research to build algos to suit specific markets, instead of offering a standard template built for developed markets. This is a welcome and much needed development," he added.

Today, algorithmic trading, including HFT, accounts for a third of the total volume on cash markets on the BSE, the oldest stock exchange in Asia. In the derivatives markets, algorithm trading is approaching half of the total trading volume. Five years ago, these numbers were sub-5%.

So why jump on the bandwagon?

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