DMA, DSA, SOR, FIX, TCA, VWAP, TWAP, one-touch, no-touch, co-lo… When you have a large auditorium filled with people listening intently to conversations where almost every sentence has one or more of the above words, you can be certain that the Indian markets have come a long way with electronic trading.
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FIX Protocol Ltd (FPL) organized a one-day conference in Mumbai this month, where participants from sell-side firms (brokerages) and exchanges unanimously stated that the proportion of trades that are executed electronically continues to rise. In a poll conducted at the conference, a majority of the sell-side firms said that electronically executed trades accounted for over 20% of total trades. With new services such as smart order routing just about taking off and usage by domestic institutional investors still being low, this will no doubt continue to be a growth area.
Electronic trading includes giving clients direct market access as well as an ability to execute trades more efficiently using algorithms. With direct market access, clients can not only get complete anonymity with their orders, but also benefit from a faster access to the market. Trade execution using algorithms is a great tool in cutting transaction costs and reducing market impact with large orders. Anant Jatia, founder director at Forefront Capital Management, says that his investment management firm has been able to cut transactions costs by half since moving all of its orders to electronic execution. It’s little wonder the markets have latched on to these services quickly. Even so, domestic institutional investors have generally been slower compared to their foreign counterparts in adapting to electronic trading. Needless to say, foreign investors were already used to these services while accessing other markets and for most of them it was just a matter of adding another market to their electronic trading suite. But since there are obvious advantages with electronic trading services, domestic investment firms too would gradually participate and this would aid the growth of the segment further.
One interesting takeaway from the conference was that domestic brokerages are doing relatively well in the space, despite the inherent advantage their foreign counterparts have. Foreign brokers, of course, have been offering these services to customers in overseas markets for years, and have built up a war chest of algorithms over these years. In India, however, electronic trading was permitted only about three years ago, and things started picking up less than two years ago. Even so, domestic brokers have adapted well and haven’t been swept away by competition from their foreign counterparts. On the contrary, in cases such as in the futures and options space, some domestic brokers are outdoing their foreign counterparts, as was pointed out by the India head of technology at a foreign broker at the conference.
Domestic sell-side firms have historically been had a strong focus in the derivatives space, and they have carried this advantage into offerings in the electronic trading side of things as well. According to the head of operations at a large domestic brokerage, Indian firms have done well also because of a greater degree of willingness to customize algorithms to suit individual client needs. Besides, the Indian equity derivatives market has some unique characteristics such as a single stock futures segment. This adds to the advantage of homegrown firms, since algorithms used in overseas markets would have to be redesigned to adapt to this uniqueness. Of course, it also helps that Indians are technologically savvy and hence wouldn’t fight shy of using technology in executing trades.
In developed markets, it’s often been said it’s akin to an arms race in the world of electronic trading. The Indian markets haven’t reached that stage, with only a few proprietary firms engaging in high frequency trading and statistical arbitrage. But it’s safe to say that thus far, domestic firms have held their own despite the larger war chest at the disposal of foreign brokers.
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