Sub-second trading on the Subcontinent. Just how fast will algo trading in India take off?
Large chunks of cash equities and derivatives trading in India are already algorithmic and the ingredients are in place for more rapid growth. Even the regulatory environment seems favourable. Mary-Ellen Barker spoke to players inside and outside of India to hear what's fuelling the trend and what they see in store.
Algorithmic trading is all the rage in India right now, and across the market the view is unanimous: the only way is up. The question is how just fast it will grow.
By the start of this year, algo accounted for some 24 percent of cash equities turnover in India and about 30 percent of equity derivatives. According to figures from the Bombay Stock Exchange, by far the smaller of the two Indian exchanges that dominate equities trading, the share for equity derivatives has already jumped to 45 percent since then.
"Algorithms and high frequency trading are the hottest topics in the market - algorithmic trading and HFT itself, and now the regulations around it," says Chetan Pandya, head of IT for one of India's largest local brokers, Kotak Securities. "This is what the majority of players in the market are focused on today."
India has the building blocks in place for a ramp-up. Co-location has been available from both the Bombay Stock Exchange and its bigger competitor, the National Stock Exchange, for 18 months. Both exchanges, and market observers, say their trading platforms can handle HFT. Direct market access is available. Smart order routing between the two exchanges has also been operating since August 2010.
The Indian regulator, the Securities and Exchange Board of India (SEBI), produced guidelines for algorithmic trading in March which brokers, exchanges and market watchers hail as a sensible response. The new rules, they say, recognise that algorithmic trading is a natural development and are aimed at preventing problems but not blocking growth.
"All the dynamics point to an increase in automated and algo trading in the next few years," according to Celent senior capital markets analyst Anshuman Jaswal, who is based in India. He expects levels of about 40-45 percent across cash equities and derivatives within the next year or so.