The resurgence of interest in the Indian markets in the past six months has spawned a new phenomenon—the growth of direct market access and algorithmic trading facilities offered by brokers. Goldman Sachs, a leader among sell-side electronic trading service providers globally, has had reasonable success since launching this facility in India early this year. Electronic trading refers to orders placed by clients directly into the exchange’s system using the direct market access facility offered by brokers. These could be simple limit/market orders or sophisticated orders based on algorithmic strategies provided by the broker.
During the second quarter of 2009, Goldman Sachs’ electronic trading volume of India equities tripled, while the electronic trading volume for futures grew more than fourfold. Of course, this is compared with a small base in the first quarter. Shuya Kekke, managing director and head of Goldman Sachs Electronic Trading in Asia, says, “We are pleased with what we have been able to accomplish for our clients seeking electronic execution in India. This is thanks to the proactive measures taken by the exchanges and the regulator in the relatively nascent juncture of electronic trading in the country.”
Goldman Sachs has been offering direct market access to its clients since 2008, a few months after the Securities and Exchange Board of India allowed these facilities for institutional investors. In early 2009, it offered its electronic trading clients three algorithmic trading strategies and last month it expanded this to nine algorithms. Siddharth Chhabria, head of India sales for Goldman Sachs Electronic Trading, says, “A large number of orders placed with Goldman for the Indian markets are using the direct market access route. Of this, as much as 90% are orders that use algorithms. The most popular algorithms are based on liquidity-seeking strategies due to the lack of depth in liquidity in many securities in India.”
For instance, one strategy popular with Goldman’s clients is “participate”, which works a large order on an exchange by placing small limit orders or “child orders”, depending on the existing liquidity in the stock. The algorithm watches market action on a tick-by-tick basis to keep in line with the exact liquidity situation in the stock and at any given time there are a number of child orders at different price points to participate in the existing liquidity.
Chhabria says that moving to algorithmic trading is relatively easy for offshore clients since it’s consistent with what they’re already doing in other markets. Besides, even some of Goldman’s domestic clients have begun using electronic trading facilities, which is happening faster than expected.
Over time, new forms of traders such as statistical arbitrageurs are expected to enter the market and this would lead to an explosion in volumes. The options market, which is quite liquid, will benefit immensely due to such statistical arbitrage orders.
Globally, electronic trading clients have a big concern about latency or the time delay in information reaching from a trader’s system to the exchange’s system and vice-versa. Latency in India is considerably higher compared with developed markets. So how are clients responding to this? Kekke says that while latency is generally a concern for clients, clients are more focused on fairness, or ensuring that everyone is treated equally. Chhabria adds that in the past year, latency on the two stock exchanges in the country has reduced considerably, giving a strong impression to investors that India is rapidly moving towards the type of advanced trading environment seen in the US and Europe.