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07-22-2010
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India – big potential for algorithmic trading
Giles Nelson
07-22-2010 06:19 AM
I spent last week inIndia, a country that, by any standards, is growing fast. Its population has doubled in the last40 years to 1.2B and economic growth has averaged more than 7% per year since1997. It's projected to grow atmore than 8% in 2010. By some measures, India hasthe 4th biggest economy in the world.
Progress has asignificant presence in India. In fact, people-wise, it's the biggest territoryfor Progress outside the US with over 350 people. Hyderabad is home to a bigdevelopment centre and Mumbai (Bombay) has sales, marketing and a professional servicesteam.
The primary purpose ofmy visit was to support an event Progress organised in Mumbai on Thursday oflast week on the subject of algorithmic trading. It was also our first reallaunch of Progress and Apama, our Complex Event Processing (CEP) platform, intothe Indian capital markets. We had a great turnout, with over 100 people turningup. I spoke about what we did in capital markets and then participated in apanel session where I was joined by the CTO of the National Stock Exchange, thebiggest in India, a senior director of SEBI, the regulator, and representativesfrom Nomura and Citigroup. A lively debate ensued.
The use of algorithmictrading is still fairly nascent in India, but I believe it has a big future.I'll explain why soon, but I'd like first to give some background on theIndian electronic trading market, particularly the equities market, which is the largest.
The market
India has several,competing markets for equities, futures and options, commodities and foreignexchange too. In equities, the biggestturnover markets are run by the National Stock Exchange (NSE) and the BombayStock Exchange (BSE), with market shares (in the number of trades) of 74% and26% respectively. Two more equity exchanges are planning to go live soon - theDelhi Stock Exchange is planning to relaunch and MCX is also currently awaitinga licence to launch. This multi-market model, only recently adopted in Europefor example, has been in place in India for many years.
It was only two yearsago that direct market access (DMA) to exchanges was allowed. Although officialfigures don't exist, the consensus opinion is that about 5% of volume inequities is traded algorithmically and between 15% and 25% in futures andoptions. Regulation in India is strong - no exchange allows naked access and theBSE described to me some of the strongest pre-trade risk controls I've comeacross - collateral checks on every order before they are matched. The NSE hasthrottling controls which imposes a limit on the number of orders a member organisation can submit per second. Members can be suspended from trading intra-day if this is exceeded. The NSE also forcesorganisations who want to use algorithms to go through an approvalprocess. I'll say more about this later. Controversially, the NSE will not allowmulti-exchange algorithmic strategies so cross-exchange arbitrage andsmart-order routing cannot take place. Lastly, a securities transaction tax (STT)is levied on all securities sales.
So, with the aboverestrictions, why do I think that the Indian market for algorithmic trading hasmassive potential?
The potential
The Indian market is verybig. Surprisingly so to many people. Taking figures from the World Federation of Stock Exchanges (thus I'm notcounting trading on alternative equity venues such as European multi-lateraltrading facilities), the Indian market, in dollar value, may still berelatively modest - it's the 10th largest. However, when you look at the numberof trades, India's the 3rd largestmarket, only beaten by the US and China. The NSE, for example, processes 10times the number of trades as the London Stock Exchange. So why isn't moretraded in dollar terms? That's because trade sizes on Indian exchanges are verysmall. The median figure worldwide is about $10K per trade. The figure in Indiais about $500 per trade, a 20th of the size. In summary, surely the task oftaming the complexity of this number of trades and the orders that go with themis ideal for algorithmic trading to give an edge? To compare toanother emerging, “BRIC”, economy, that of Brazil, where the number of firmsusing Apama has gone from zero to over 20 in as many months, the dollar marketsize is fairly similar but the number of equity trades in India is 33 timesmore. The potential in India is therefore enormous.
India is already there in other ways. All exchanges are offeringco-location facilities for their members and debate has already moved on tothat common in more developed markets on whether this gives certain firms anunfair advantage or not and whether co-location provision should be regulated.
The challenges
There are somedifficulties. The STT is seen by some as an inhibitor. However, its effect isoffset somewhat by the fact that securities traded on exchange are not subjectto capital gains tax.
The NSEprocess for approving algorithms is more controversial. Firms that want toalgorithmically trade must show to the NSE that certain risk safeguards are in placeand “demonstrate” the algorithm to the exchange. As the biggest exchange, theNSE wields considerable power and thus its decision to vet algorithms puts abrake on market development. I believe this process to be unsustainable for thefollowing reasons:
It strikes me that theNSE should spend its efforts into ensuring that it protects itself better. Perhapsa reasonable comparison is a Web site protecting itself from hacking and denialof service attacks. If they can do it, so can an exchange. And it would offermuch better protection for the exchange and the market in general.
In conclusion
I'm convinced of thegrowth potential in India for algo trading. The market is large, the user baseis still relatively small and many of the regulatory and technical prerequisitesare in place. There are some inhibitors, outlined above, but I don't think they'llhold the market back significantly. And finally, why should India not adoptalgo trading when so many other, and diverse, markets have?
Progress has its firstcustomers already in India. I look forward to many more.
Source...
07-22-2010 06:19 AM
I spent last week inIndia, a country that, by any standards, is growing fast. Its population has doubled in the last40 years to 1.2B and economic growth has averaged more than 7% per year since1997. It's projected to grow atmore than 8% in 2010. By some measures, India hasthe 4th biggest economy in the world.
Progress has asignificant presence in India. In fact, people-wise, it's the biggest territoryfor Progress outside the US with over 350 people. Hyderabad is home to a bigdevelopment centre and Mumbai (Bombay) has sales, marketing and a professional servicesteam.
The primary purpose ofmy visit was to support an event Progress organised in Mumbai on Thursday oflast week on the subject of algorithmic trading. It was also our first reallaunch of Progress and Apama, our Complex Event Processing (CEP) platform, intothe Indian capital markets. We had a great turnout, with over 100 people turningup. I spoke about what we did in capital markets and then participated in apanel session where I was joined by the CTO of the National Stock Exchange, thebiggest in India, a senior director of SEBI, the regulator, and representativesfrom Nomura and Citigroup. A lively debate ensued.
The use of algorithmictrading is still fairly nascent in India, but I believe it has a big future.I'll explain why soon, but I'd like first to give some background on theIndian electronic trading market, particularly the equities market, which is the largest.
The market
India has several,competing markets for equities, futures and options, commodities and foreignexchange too. In equities, the biggestturnover markets are run by the National Stock Exchange (NSE) and the BombayStock Exchange (BSE), with market shares (in the number of trades) of 74% and26% respectively. Two more equity exchanges are planning to go live soon - theDelhi Stock Exchange is planning to relaunch and MCX is also currently awaitinga licence to launch. This multi-market model, only recently adopted in Europefor example, has been in place in India for many years.
It was only two yearsago that direct market access (DMA) to exchanges was allowed. Although officialfigures don't exist, the consensus opinion is that about 5% of volume inequities is traded algorithmically and between 15% and 25% in futures andoptions. Regulation in India is strong - no exchange allows naked access and theBSE described to me some of the strongest pre-trade risk controls I've comeacross - collateral checks on every order before they are matched. The NSE hasthrottling controls which imposes a limit on the number of orders a member organisation can submit per second. Members can be suspended from trading intra-day if this is exceeded. The NSE also forcesorganisations who want to use algorithms to go through an approvalprocess. I'll say more about this later. Controversially, the NSE will not allowmulti-exchange algorithmic strategies so cross-exchange arbitrage andsmart-order routing cannot take place. Lastly, a securities transaction tax (STT)is levied on all securities sales.
So, with the aboverestrictions, why do I think that the Indian market for algorithmic trading hasmassive potential?
The potential
The Indian market is verybig. Surprisingly so to many people. Taking figures from the World Federation of Stock Exchanges (thus I'm notcounting trading on alternative equity venues such as European multi-lateraltrading facilities), the Indian market, in dollar value, may still berelatively modest - it's the 10th largest. However, when you look at the numberof trades, India's the 3rd largestmarket, only beaten by the US and China. The NSE, for example, processes 10times the number of trades as the London Stock Exchange. So why isn't moretraded in dollar terms? That's because trade sizes on Indian exchanges are verysmall. The median figure worldwide is about $10K per trade. The figure in Indiais about $500 per trade, a 20th of the size. In summary, surely the task oftaming the complexity of this number of trades and the orders that go with themis ideal for algorithmic trading to give an edge? To compare toanother emerging, “BRIC”, economy, that of Brazil, where the number of firmsusing Apama has gone from zero to over 20 in as many months, the dollar marketsize is fairly similar but the number of equity trades in India is 33 timesmore. The potential in India is therefore enormous.
India is already there in other ways. All exchanges are offeringco-location facilities for their members and debate has already moved on tothat common in more developed markets on whether this gives certain firms anunfair advantage or not and whether co-location provision should be regulated.
The challenges
There are somedifficulties. The STT is seen by some as an inhibitor. However, its effect isoffset somewhat by the fact that securities traded on exchange are not subjectto capital gains tax.
The NSEprocess for approving algorithms is more controversial. Firms that want toalgorithmically trade must show to the NSE that certain risk safeguards are in placeand “demonstrate” the algorithm to the exchange. As the biggest exchange, theNSE wields considerable power and thus its decision to vet algorithms puts abrake on market development. I believe this process to be unsustainable for thefollowing reasons:
- As themarket develops there will simply be too many algorithms for the NSE to dealwith in any reasonable timeframe. Yes, India is a low-cost economy, but youneed highly trained people to be able to analyse algorithmic trading systems. You can't simply throw more people at this. Firms will want to change theway algorithms work on a regular basis. They can't do this, with this processin place.
- It raises intellectual property issues. Brokers will increasingly object torevealing parts of their algorithms and their clients, who may want to runtheir alpha seeking algorithms on a broker-supplied co-location facility, willmost definitely object.
- It putsthe NSE in an invidious position. Eventually an algo will “pass” the processand then go wrong, perhaps adversely affecting the whole market. The NSE willhave to take some of the blame.
- Competitionwill force the NSE's hand. The BSE is trying to aggressively take back marketshare and other exchanges are launching which will not have these restrictions.
In conclusion
I'm convinced of thegrowth potential in India for algo trading. The market is large, the user baseis still relatively small and many of the regulatory and technical prerequisitesare in place. There are some inhibitors, outlined above, but I don't think they'llhold the market back significantly. And finally, why should India not adoptalgo trading when so many other, and diverse, markets have?
Progress has its firstcustomers already in India. I look forward to many more.
Source...