The rising tide of global investors means there are new pressures on the Indian markets for adopting global best practices in terms of trading systems and platforms. The Indian market is only now catching up in DMA or algorithmic trading capabilities. Speakers at the SunGard Mumbai City Day said the time was right for change; brokerages have to move to the next level of efficiency and transparency if they have to grow and build on the opportunities now at hand.
The SunGard Mumbai City Day, it tuned out, was also the day of some happy auguries on the markets. The Bombay Stock Exchange Sensitive Index, or Sensex, jumped 485 points that day, an increase of 2.4%, giving a new edge to the bull run in Indian equities. The rise mirrors India’s robust growth story, which has attracted foreign institutional investors and brought a boom in the equities market. Foreign funds have poured some US$23bn into Indian equities up to mid-October this year, the highest ever on record for any calendar year. “The sun is clearly shining brightly on SunGard’s Mumbai City Day,” joked Mr.M Damodaran, the key note speaker who is the former Chairman of India’s key regulatory body, the Securities and Exchange Board of India, or SEBI.
The rising tide of global investors means there are new pressures on the Indian markets for changing legacy systems and adopting global best practices in terms of trading systems and platforms. The Indian market is only now catching up in Direct Market Access (DMA) or algorithmic trading capabilities. Speakers at the SunGard Mumbai City Day session on “Key Trends in Global and Indian Electronic Trading” said the time was right for change; brokerages have little option but to move to the next level of efficiency and transparency if they have to grow and build on the opportunities now at hand.
Anshuman Jaswal said, Senior Analyst for Celent, “Investment in technology has not been a priority in the Indian context. The way our market is, we do not have very large players who can invest and lead the market but this is changing. There was a time when French and German brokerages were late to react to technologies like DMA and business went to London and Switzerland. So if I were to predict, there is a pretty good chance that brokers who do not adopt technology will perish. It is now a question of survival, not just about making some more profits.”
Jaswal made the remarks in reply to a question on whether the Indian market was ready for large investments in technology that will be required if the market is to catch up with its Asian peers and look to global standards of operation.
India is a large, diverse country and the markets work within an ecosystem nourished by some 3,000 brokerages, many of them delivering small volumes. This is different from, say Singapore, which has just over 100 brokerages. So while the disparate, myriad Indian firms cater to a disparate audience with needs that vary from voice orders to personalised attention, there is the view that consolidation is the next logical step in a market that is changing and increasing in complexity.
In an interview ahead of Mumbai City Day, Samir Jayaswal, Sales Director for SunGard in India explained, “There is a tendency among domestic brokerages to prefer functionality over performance. There is not much of a premium on performance so a few milliseconds here or there may not always matter. There is on the other hand a huge emphasis on costs, so a solution that comes cheap may be preferred.”
An increasing demand for performance
But with booming markets, rising tide of foreign funds pouring in and the consequent demand for performance, the scenario is fast changing.
“As global investors flock to India, they look for doing business with brokerages which are mature and are sensitive to their needs. Brokerages in turn look at technology partners that bring reliability, scalability and global experience. A lot is expected from Indian brokerages while India transforms itself from a silo investment destination to a well integrated investment marketplace. Foreign investors demand the scale and quality of execution which don’t exist with domestic brokerages. Domestic brokerages are not very sensitive to performance and lay a lot of emphasis on functionality and speedy implementation. They don’t really pay a premium to performance, an aspect which will change in future,” Jayaswal of SunGard India explained.
Jayaswal said the overall market will grow as India continues on a growth path with high GDP growth rates but there will be consolidation amongst the number of brokers. “Only those with superior execution capabilities and capital will survive. Indian vendors are in learning mode and don’t have global experience. They experience along with their clients which can at times prove very expensive for the client. To provide quality execution, brokers will need vendors like SunGard which can lead the market by experience,” he added.
As it is, the growing complexities in the market demand the use of technology solutions, ranging from pricing plans for clients to complex risk decisions.
Chetan Pandya, Head for Information Technology at Kotak Institutional Equities, explained it rather well with an analogy that would be immediately understood in India, which is a mass mobile market with more than 650 million mobile phones. There was a time, Pandya explained, when some people sat behind a desk and devised a new pricing plan for mobiles every other day, which was then offered to customers some days down the line. As competition grew, as number of users rose and as demands from the market came to be felt as pressure on companies, pricing became a complex process. Now, no single person can devise a plan and companies have invested huge amounts in data mining, prospect finding and trend finding to devise pans in a market as competitive and hot as India is in mobile services.
Similarly, it has been pretty easy in India to devise brokerage plans but as the market here grows in complexity, size and competitive intensity, technology will come into play not just in systems and trading platforms but also in building and servicing the customer base with plans and services that are optimal.
The run for low latency in India
In many senses, speakers agreed that the Indian market was indeed ripe for change.
Said Pramod Bothra, Director of a brokerage called Evermore, “The three prerequisites for Algo trading and DMA in the Indian markets are already in place. The Indian authorities allowed DMA in 2008 (albeit only for institutional clients), co location in 2009 and Smart Order Routing in 2010. DMA and algorithmic trading are a fact and happening in the Indian markets, and it is only a matter of time before this takes off.”
However, comfort levels are still not high and so just about 10 percent to 15 per cent of volumes are through DMA. “Change is underway but it still takes time to change the attitude of people,” said Jaswal of Celent. “Within a year or two, the Indian market should be at a par with its Asian peers,” he added.
Already, all manner and forms of solutions are available in India and are being used in various pockets.
“Name what you want…all the abbreviations that are heard all around and you have it in India – DMA, SOR, algo, co-location, proximity hosting, high speed market data, time stamped market data and post trade analysis. From milliseconds to micro seconds, the drive is on. It is a very competitive world in India and in some cases it is a ‘take-all-or-none’ game in the market for executions. The latency will continue to drop and we have ever improving infrastructure providers and vendors,” Pandya of Kotak Institutional Equities said.
Take for an example a view of latency across Asian order books. According to Celent, ASX (Australia) and SGX (Singapore) lead with latency of under 1 millisecond whereas NSE in India comes next with 2.5 milliseconds and TSE (Japan) has a 2 to 5 millisecond range.
Pandya pointed out, “You will see a one millisecond and a sub millisecond time also coming to the market but this is a gradual progression. Latency will continue to drop and throughput from both the exchanges (Bombay Stock Exchange-BSE and National Stock Exchange-NSE) will continue to go up. The best thing is that our exchanges understand the significance of providing infrastructure that scales up, is fast and on par with the world. Both the exchanges have done an enormous amount of work and we are reaping the benefits of this today.”
The Indian capital market specificities
BSE and NSE are the dominant exchanges in India, and equities volume is concentrated in these two exchanges. This situation mirrors the rest of Asia, where an overwhelming 98.9 per cent of equities volume is conducted on exchanges and is concentrated usually on one flagship exchange. In contrast, 42 per cent of US volume is executed off exchange, whereas a slightly lower proportion of 30 per cent is executed on European MTFs like Turquoise and Chi-X, according to Celent.
Jaswal of Celent pointed out that the leading Asian markets for electronic trading, namely ASX, TSE and SGX have the lowest trading costs among equity markets in Asia-Pacific. Trade sizes are falling as well; the higher use of algorithmic trading is visibly impacting the trade sizes in leading Asian markets.
From the Asian buy side, the leading reasons for algorithmic trading usage are costs and anonymity (leading reasons, 28 per cent each) followed by trader productivity (23 per cent), speed (13 per cent) and price improvement (8 per cent). VWAP, or Volume Weighted Average Price, is still the main algorithm type but usage of other algorithms like Implementation Shortfall (IS) and Participation algos has also risen.
Jaswal said he expects a gradual but steady evolution in Asian market structure and fragmentation where new entrants will gain market share but incumbent exchanges will also benefit from the overall rise in trading volumes as the pie gets bigger. Volumes are expected to grow by some 15 per cent a year, primarily driven by economic fundamentals and high velocity traders and proprietary arms of investment banks.
Looking to the evolution of the US equities market as a precursor to the evolution of other markets and a milestone for measuring maturity, European equities markets are modelling themselves on the US pattern and moving closer to maturity. Asian equity markets are where Europe was pre-MiFID, and can be regarded as the ‘Now’ marketplace whereas Latin America is behind Asia, and will be the ‘Next’ marketplace to watch for evolution.
“So a lot of growth and activity will happen in Asia at this point in time,” Jaswal of Celent pointed out.
Where does India stand in this evolution?
In a pyramid of evolution where HFT stands at the pinnacle, the base is built by connectivity, which comes through SOR, multiple venues and co location. This is followed by the next stage in the pyramid, which comprises execution algorithms like VWAP, TWAP (Time Weighted Average Price) or IS. Both of these foundational blocks are already present or are beginning to evolve in e-trading markets of Australia, Singapore, Japan, Hong Kong and India. So at this level, India joins its more advanced Asian counterparts.
DMA and DSA have been slower to take off in India but are expected to be realised to the full potential in India sooner. According to Celent, over 200 brokerages have taken permission for DMA and some 80 to 90 brokerages are already putting their algo strategies to use.
The introduction of DMA spurs FIX adoption, something not talked of in India earlier. Now, a lot of brokerages and buy-side are talking of adopting the FIX protocol in India. Over time, there will be a steady increase in the implementation of FIX in India, driven by an increase in volumes, the need to move up the value-chain, ease in processing, executing and monitoring orders electronically, demands of international clients, compliance requirements and Straight-Through-Processing (STP) requirements for post-trade activities.
Control, speed and cost remain the key drivers for DMA. Foreign Institutional Investors, FIIs, are driving change in India. There is also a greater acceptance among Domestic Institutional Investors, DIIs, especially the top mutual funds. However, there are tight restrictions on DMA and what the Indian market is seeing is mainly “low touch” DMA as players take time to adjust to the system. Foreign and Tier-one domestic brokerages are well geared up; tier-two brokerages are in the process of adopting technology.
Of course, Alternative Trading Systems (ATS) and Darkpools are innovations that India has consciously avoided and it will be sometime before these are considered here. So it will be sometime before the potential of HFT can be fully realised.
Yet, all of these measures are being built into the system in a compressed timeframe of two to three years against a decade or so it took a leading market like the United States to adopt these steps and embrace change.
Trading volume has grown at over 30% CAGR during last four year period in India. With the adoption of advanced trading tools, volumes are likely to grow even further. Managing the flow of orders for such high number of trades will require advanced technologies from an operational point of view as well, Jaswal noted.
A strong retail investment business
Comparing the various legs of India’s financial markets, it is clear that the retail securities market segment has the highest level of internet penetration, so this remains the best market in terms of adopting new technology and providing newer services. In that sense, the securities market is ahead of mutual funds, insurance and pension schemes. The retail segment in capital markets currently constitutes some 21% of overall turnover. The number of retail Indian equity investors is expected to cross 25 million by 2012. Clearly, retail participation in capital market is booming and mobile trading will only add to the momentum.
Mobile trading is expected to receive good support from the establishment as well because it will help achieve goals of financial inclusion given that mobile handset penetration in India is deep and services have been enthusiastically adopted by common Indians at large, in urban as well as rural areas.
Said Pandya of Kotak Institutional Equities, “Wireless will be the key … Today, the government and the regulator understand that if financial inclusion goals have to be achieved whether through participation in banking, capital markets or any other form, mobile ecosystems are going to be important and you will see proactive approaches from government and the industry to help build and support a very robust, reliable and cheap mobile ecosystem for people to use and do transactions.” Pandya called this “a very crucial work-in-progress,” saying that if it is successful, it will help in meeting the entire range of goals for financial inclusion.
Financial inclusion remains an elusive goal but a key achievement parameter for the Indian government, which must strike a balance between economic reforms to achieve high GDP growth and at the same time ensure that the weaker sections and the poor in this country of 1.1 billion people are not marginalised or ignored in the process. Financial inclusion is an oft-stated goal of various senior leaders in the government of Indian Prime Minister Dr.Manmohan Singh.
In the end, India may present some sense of a paradox.
On the one hand, there is a deep interest in the latest technologies and putting them to work in the Indian context. India excels in Information Technology solutions and IT Services are an important export of India. Market participants like Bothra of Evermore are proud of this fact and say electronic trading is therefore a natural solution for a country like India. And as Pandya pointed out, there are people here also working on a “neural trading system” – silently and with dedication, building for the future.
On the other hand, the Indian markets can be slow to change and the process for adoption of technology is gradual as the regulator remains cautious and infrastructure takes time to match up.
As Pandya said, “The message from industry is to make very simple and functional things to begin with and if that works to build something further rather than build a Taj Mahal straightaway, which would take an enormous amount of time and money and which may not come to the market or be used or by the time you build the best, the market could be lost.” The message: smart execution is the key.
And Jaswal pointed out that technology is not only to meet the immediate or growing needs of the market. It remains a crucial ingredient to the dream that Mumbai be developed into an international financial centre of repute. “If you look at the bigger picture, then without technology, this is not going to happen,” he said.
There could be no better realisation of this and the bigger picture than the large number of people who thronged the SunGard Mumbai City Day, an attendance that would not have been seen on earlier such occasions.