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Algorithmic Trading In India: History, Regulations, Platforms And Future

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By Author: Viraj Quant
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Execution of trades on stock exchanges based on predefined criteria and without any human intervention using computer programs and software is called algorithmic trading or algo trading. While being a subset of algorithmic trading, high-frequency trading involves buying and selling thousands of shares in fractions of seconds.

While it has its detractors, the general consensus is that algorithmic trading is an inevitable evolution of the trading process and markets around the world have implemented various measures to provide a seamless experience to investors. In the US and other developed markets, High-Frequency Trading and Algorithmic trading accounts for an estimated 70% of equities market share. In India, the percentage with respect to the total turnover has increased up to 49.8%.

In this article we will cover the following points:
- Algorithmic Trading in India: Past, Present and Future
- Regulations in Indian Stock Markets
- Algorithmic Trading Platforms
- How to Start your Algorithmic Trading Journey
- Frequently Asked Questions about the Future of Algorithmic Trading
- Algorithmic Trading in India: Past, Present and Future

On April 3rd 2008, Securities & Exchange Board of India (SEBI), introduced algorithmic trading by allowing Direct Market Access facility to institutional clients. In short, DMA allows brokers to provide their infrastructure to clients and gives them access to the exchange trading system without any intervention from their part. Initially, it was provided only to institutional clients and not retail traders.

Nevertheless, the facility brought down costs for the institutional investor as well as help in better execution by cutting down the time spent in routing the order to the broker and issuing the necessary instructions.

April 29th 2008, this facility had already become popular with some of the top global players signing up for the DMA facility. FI’s & FII’s like UBS, Morgan Stanley, JP Morgan and DSP Merrill Lynch were the entities awaiting approval. Edelweiss Capital, India Infoline and Motilal Oswal Securities were among others who had submitted their request to the stock exchanges. It is worthwhile to note that Foreign Institutional Investors (FIIs) were allowed to use DMA facility through investment managers nominated by them, from February 24th 2009.

By July 31st 2008, leading brokerages along with stock exchanges were preparing the ground for operationalising Direct Market Access (DMA). Brokerages such as Citi, Merrill Lynch, Morgan Stanley, JP Morgan, Goldman Sachs, CLSA and Deutsche Equities had started holding test runs of their DMA software, in an attempt to synchronise it with the systems at the stock exchange.

NSE’s Contribution To The Industry
The National Stock Exchange (NSE) started offering additional 54 colocation server 'racks' on lease to broking firms in June 2010 in an effort to improve the speed in trading.

Deutsche Bank, Citi, Morgan Stanley, Goldman Sachs, and MF Global were among the foreign broking firms which availed of the facility. Motilal Oswal Securities, JM Financial and Edelweiss Capital figured among the prominent domestic firms who signed up for the racks.

Local brokerages like Globe Capital, SMC, Global Vision, East India and iRageCapital had also opted for the facility. Not surprisingly, with a few weeks of offering this facility, there was a long period of waiting up to 6 months to get a space on the server racks!

It was clear to the Indian exchanges and regulatory bodies that Algorithmic Trading is well-received by the institutional clients and banks in the country and its demand would continue to rise. This was the time when exchanges started improving their offerings in the automated trading domain, financial technology companies started offering automated trading platforms and SEBI continued to regulate the markets.

May 12th 2010, NSE moved to enable the Financial Information Exchange (FIX) protocol on its trading platform boosting transaction speed for overseas investors using direct market access.

In simple terms, the FIX protocol helps in converting the language of the orders given by the Foreign Institutional Investors (FII) in the language understood by the NSE, in effect reducing the time taken for the transaction to be executed.

Changes to the Brokerage Industry
Broker commissions had started shrinking as a result of an increasing number of institutional clients warming up to the Direct Market Access (DMA) concept. To keep up with the times, they started offering automated software to the clients.

The new entrants to this space are discount brokers who are essentially brokers who provide facilities at very low brokerage charges. They are able to do this by providing only minimal facilities, unlike full-service brokers who usually provide support as well as training programs for their clients.

Regulations In Indian Stocks Markets
Every year SEBI comes up with regulations to be followed by traders and brokers to keep the trading industry safe and risk-controlled. To read about SEBI’s recent announcement regarding the algorithmic trading industry in India, go to the post here.

Risk management is critical with algorithmic trading. That is why, for any algorithm to be approved by the markets, exchanges require a firm to undergo a series of stringent tests if it intends to trade through algo trading. These tests include the number of orders that would be placed per second, the maximum order value of any order placed, and the maximum traded quantity during a particular trading day.

A brief summary of the latest SEBI circular (SEBI/HO/MRD/DP/CIR/P/2018/62) dated April 09, 2018 is given below:

Managed colocation service
It is suggested that exchanges should change the pricing structure of their co-location renting to make it accessible to small and medium-sized members as the current practice of renting the entire server rack to one entity leads to a high cost.

Latency measurement
In order to provide greater transparency when it comes to reporting the latency for colocation and proximity hosting, it has been suggested that the exchanges should provide minimum and maximum as well as the mean latencies along with the latencies at 50th and 99th percentile.

Tick-by-tick data feed
SEBI has suggested providing tick-by-tick data feed free to the members of the exchanges.

Unique identifiers for algorithms
SEBI has instructed that all algorithmic orders reaching their platform should be tagged with the unique identifier which is assigned when the specific algorithm was submitted for approval.

Future Of Algorithmic Trading In India
With several amendments over the years, India provides a good opportunity for algorithmic trading due to a number of factors such as colocation facilities and sophisticated technology at both the major exchanges; a smart order routing system; and stock exchanges that are well-established and liquid.

Given the rapidly growing trend and demand of HFT and Algorithmic Trading in developing economies & emerging markets, there have been efforts by various exchanges to educate their members and develop the skill sets required for this technology-driven field.

With many different trading platforms and tools available in the market, each claiming to be better than the other, a person who is testing the water in the field of Algo trading may be spoilt and confused by choice. Therefore, we have compiled a list of some of the most popular platforms and algo trading softwares that are being used in the market today (specifically for Indian equity markets), so as to level the playing field and give a clear picture to the users.

Read the complete article here: https://blog.quantinsti.com/algorithmic-trading-india/

If you want to learn various aspects of Algorithmic trading then check out our Executive Programme in Algorithmic Trading (EPAT®): https://www.quantinsti.com/epat/

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