Algo Trade May Account For 30% Of Cash Volume By '12 From 20% Now
ALGORITHMIC trading in shares listed on Indian stock exchanges could account for 30% of the overall cash market volumes by 2012, compared with around 20% at present, according to US-based consulting firm Celent, citing liquid stock exchanges, sophisticated technology and connectivity as the enabling factors.
Algorithmic trading — also commonly known as programmed trading — entails the use of a pre-written software code to execute transactions, without manual intervention. They are of two types: execution and situational. Execution algorithms minimise the impact cost while executing large orders by spreading them through the day, with price and volume specifications. Situational algorithms are more sophisticated and triggered when certain conditions are fulfilled. For instance, a complex algorithm could generate a buy order depending on a combination of moves in stock price, index level and currency rate.
"India represents an excellent opportunity for algorithmic (quantitative or systematic) tradersduetotheconfluenceofseveral factors: a supportive legal and regulatory framework, well-established and liquid stock exchanges, sophisticated technology and connectivity to the exchanges, presence of all major banks and broking firms, abundance of people with relevant knowledge and experience, and limited competition in the space," says the Celent report, titled, "Electronic Trading in Asia-Pacific: A Market by Market Update on the Dynamic Region".
According to the Celent report, algorithmic trading in five of Asia's leading markets -- Singapore, Hong Kong, Japan, Australia, and India -- has seen a sharp rise in the past couple of years.
Celent expects that within three years, these markets will have caught up with the European market in terms of volumes of algorithmic trading and high frequency trading (HFT). For instance, in Singapore, the introduction of ADR trading was accompanied by tax exemptions to encourage market makers to participate. Similarly, there are rebates for options trading in Hong Kong.
In the case of India, the report says that adoption of new technology has been gradual compared with some of its peers in Asia, and this trend could continue.
"The tight spreads (difference between bid and ask prices), low visible liquidity on the bid and offer, and high trade rate require a lot of effort and skill to execute a good trade," says the report, adding that the imposition of securities transaction tax has reduced the prospects for arbitrageurs and high-frequency traders, and impacted algorithmic trading to some extent.
"Another issue is that the algorithms have to be scrutinised by the market regulator and the stock exchanges before permission is granted. On the NSE, approximately 60 pre-trade risk parameters are tested as part of the approval process. Order flow is limited by the exchange to 200 orders per second from within the exchange and 40 orders per second from outside," the report says.
