Algo in India Set to Double as Goldman, Nomura Fight for Pennies………..
Computer-based trading in India’s $1.5 trillion stock market may double to half of all orders within three years as demand for speedier execution surges, according to the Bombay Stock Exchange.
Automated programs carry out about 25 percent of Indian orders currently, Sayee Srinivasan, head of product strategy at Asia’s oldest bourse, said in an interview yesterday. About 60 percent of U.S. stock trades daily come from firms that rely on fast-paced executions, according to Tabb Group LLC.
“Algorithmic trading is coming up in a big way and will grow rapidly as more firms adopt the technology,” said Srinivasan, who is based in Mumbai. “Automated trading is huge internationally. In developed markets, algo trading is the major contributor to turnover.”
While brokers increasingly seek to exploit short-lived market opportunities by transacting thousands of shares a second, exchanges worldwide are building faster networks to fend off competition from alternative platforms that allow firms to trade anonymously and with lower transaction costs. Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and Nomura Holdings Inc. (8604) say a mix of tight buy and sell spreads, a large volume of smaller orders and no midday break make India ideally suited for growth in algorithmic trading.
The BSE and National Stock Exchange of India Ltd., the nation’s biggest, started high-speed trading in 2009, about a year before the Tokyo Stock Exchange Group Inc. introduced its Arrowhead platform that cut processing to 5 milliseconds from 2 to 3 seconds. Australia’s ASX Ltd. in December moved to a platform that reduced the average time to 250 microseconds from 3 milliseconds. A millisecond is one thousandth of a second and a microsecond is one millionth.
India “is a big priority for us,” Murat Atamer, head of electronic trading product at Credit Suisse in Hong Kong, said in a phone interview. High-frequency trading accounts for as much as 60 percent of trades done by some of firm’s clients in the South Asian nation, greater than the proportion in Australia, Hong Kong and Singapore, he said.
Faster trading technology has also contributed to a surge in turnover of equity derivatives on the 17-year-old NSE, whose shareholders include Goldman Sachs and Temasek Holdings Pte., bolstering its lead over the 135-year-old rival backed by Deutsche Boerse AG (DB1) and Singapore Exchange Ltd. (SGX)
Index options worth 183.65 trillion rupees ($4.1 trillion) traded on the NSE in the year ended March 31, up fivefold from 2008-2009, and accounting for 63 percent of the total derivatives turnover of 292.48 trillion rupees, data on its website show. The bourse processes up to four million derivative contracts every day and as many as seven million trades in the cash segment, Spokeswoman Divya Malik Lahiri said.
“Volumes have skyrocketed because of a massive increase in index options and that has happened due to a reduction in costs and the contribution of technology,” Tushar Mahajan, head of derivatives at Nomura Financial Advisory & Securities (India) Pvt. in Mumbai, said in an interview. “The best algorithms fight for each penny in a way that humans cannot.”
Nomura has seen a “significant increase” in volumes from rapid trading in India in the past year, according to Mahajan. At Goldman’s Indian unit, more than 90 percent of stock volume “is now directed via algorithms versus straight-to-market orders,” Siddharth Chhabria, executive director at Goldman Sachs Electronic Trading in Singapore, said in an e-mail.
High-frequency trading has helped cut costs and narrowed the gap between the price that a buyer is willing to pay and what a seller wants to receive.
Automated trades over the direct market access platform are 10 times more cost-effective than what third party brokers like us would charge,” T.S. Harihar, co-head of institutional derivatives at ICICI Securities Ltd., said in an interview. “Third-party brokers have been forced to reduce commissions to stay competitive.”
The NSE last month permitted cross-exchange high-frequency trading following a decision by the market regulator to permit firms using the technology to choose between bourses for best price. The move has increased the BSE’s chances of taking back share from the rival that controls more than 90 percent of the combined cash and derivatives markets.
“Participants should be allowed to trade where they want and their algos should be given access to execute trades across exchanges,” said BSE’s Srinivasan. “We provide network to all members. We don’t have such restrictions,” he said, referring to NSE’s requirement that its members seek approval before routing their high-speed trades to other exchanges.
NSE says its rules are meant to lower risks and prevent events like the plunge in U.S. stocks on May 6, 2010, when $862 billion in equity value was briefly erased from the market.
India’s market regulator “asked to us to maintain checks and balances well before the May 6 flash crash,” Ravi Narain, chief executive officer, said in an interview. “We check algos for safeguards so that there are no systemic risks. That’s why I feel algos and high-frequency trading will grow nicely in India and hopefully without the accidents we have seen elsewhere.”
Fast-paced trading played a role in the May 6 crash. The automatic execution of a sale of futures contracts valued at about $4.1 billion helped trigger the plunge, according to an Oct. 1 report by the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission.
Credit Suisse has enhanced its risk-management systems across Asia by adopting “intraday fat-finger detection” that stops the computer program if the error causes a significant price move against its clients, Atamer said.
“In other markets, algorithmic trading is viewed as more of an efficiency enhancement tool but for India it is absolutely essential,” he said. “India is a very dynamic market that is prohibitively difficult for traders to execute manually.”
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