The National Stock Exchange (NSE) has developed a new trading application, NOW, which connects its trading members to the exchange through the Internet.
The new application has a host of additional features compared with NSE’s previous offerings, NEAT and NEAT PLUS, especially to do with risk management at various levels for a trading member. These include setting trading limits, disallowing trades in certain securities and automatically closing positions of clients who fall short on margins.
Besides, since connectivity is possible through the Internet, trading members can expand operations much faster and at a much lower cost. That’s not all.
Trading members and their clients can access not only NSE’s cash, equity derivatives and currency derivatives markets, but also the commodity derivatives market run by the National Commodity and Derivatives Exchange Ltd.
According to NSE officials, there are plans to offer trading on the Bombay Stock Exchange as well using the NOW platform. When new markets such as interest rate futures are launched by NSE, they too will be available on the platform. There are some basic algorithmic functions as well in the application, such as placing a single order for a basket of securities.
One of the first things that NOW brings to mind is that it is competition for existing front-end trading solutions available in the Indian market.
One expert on exchange infrastructure notes that it could well be a fallout from increasing competition with the Financial Technologies (FT) group, which dominates the market for such solutions. According to research firm Celent, FT’s flagship front-office trading product, ODIN, has an 80% market share in India.
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According to market chatter, the competition has heated up to an extent where NSE refused to provide the application programming interface (API) related to its currency futures trades with FT. The buzz is that sharing the API would give the FT group, also the promoter of Multi Commodity Exchange (MCX), which will launch its own currency futures market on Tuesday, access to information such as who are the big traders in the currency futures market, in order to lure them to the MCX platform.
That theory is debatable. One just needs to ask around a bit to find out who the big traders are. In any case, conspiracy theories abound when competition heats up. The more pertinent questions are why there’s so little competition for front-end trading solutions in India and whether it’s good for the markets that exchanges are involved in providing these solutions.
In developed markets, there’s not only much more competition in this market, but it also turns out that exchanges generally stay away from providing front-end solutions. Apart from perhaps some legacy solutions, one wouldn’t find the world’s top exchanges providing upgrades and new solutions to its trading members. In fact, the market is evolving so fast, with more sophisticated algorithmic trading and access to new markets and segments, that it is a large business by itself to manage. Most large exchanges globally are hence focused on providing the back-end trading platform, fast connectivity and clearing and settlement.
Also, in principle, there seems to be a conflict of interest when exchanges compete with other front-end solutions providers. In India, for instance, trading members need to validate the trading solutions they plan to use for algorithmic trading. In other words, NSE will check each solution to see if it meets regulations, before allowing a trading member to use it. There’s no harm per se in the validation by an exchange, since large algorithmic trading firms are suspected to have gotten into mischief in the past by culling order book data and devising software programs that border on market manipulation.
The problem arises when the exchange is a competing solutions provider. On the one hand, it has an undue advantage with respect to access to proprietary algorithms and can well incorporate some of them into its own solution. On the other, it can go slow on the validation process of rival firms to cause them loss of business. These arguments may not be true of NSE at this point, but they do raise valid issues and concerns from the market’s point of view.
As far as the lack of competition in the market goes, top providers such as GL Trade may have stayed away because of the ban (till recently) on direct market access and algorithmic trading. There was hardly any need till now to have a sophisticated trading solution. With these doors now being opened and new markets such as currency futures becoming available, top solutions providers should soon enter the market and provide Indian clients the best in trading technology.
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