Algorithmic Trading

India's financial institutions set to embrace electronic trading

As India readies itself for a technology revolution in the equity markets, domestic financial institutions are starting to adopt algorithmic and other sophisticated electronic trading techniques that are the staple of foreign institutional investors, says Tarun Kataria, India CEO of Religare Capital Markets.

“People should look at the equity market in India as a highly sophisticated market. We've had stock exchanges for close to 150 years, longer than most other economies in Asia. The next stage of this evolution is to embrace technology which is well underway,” says Kataria, who was appointed to his current role in May 2010 and was formerly managing director of global banking and markets at HSBC.

Religare Capital markets is the investment banking and institutional securities arm of financial services group Religare Enterprises which also has subsidiaries and joint ventures in retail broking, asset management and insurance.

Electronic trading is gaining pace in India. Boston-based financial research and consulting firm Celent estimates that 15% of cash equity trading volume on the National Stock Exchange (NSE) is accounted for by algorithmic trading and around 20-25% by futures and options. The country's stock market regulator, Securities and Exchange Board of India (SEBI), issued a circular on 27 August permitting smart order routing (SOR) in the securities market and many foreign brokers are planning to launch SOR in India after receiving final guidelines from the NSE and the Bombay Stock Exchange, India's other main market.

Foreign institutional investors are keen to see the continued evolution and development of technology for trading the Indian equity markets and are keen to utilise the same smart technology that is prevalent in other global markets, Kataria says. “Direct market access, FIX connectivity and smart algorithms are just a few of the requirements that are both needed and desired,” he adds.

“The more interesting question is; will the domestic financial institutions start to adopt electronic trading? They may not have been ready a year ago but I believe are increasingly adopting these technologies. There is a need to improve efficiency and frankly reduce labour costs,” he notes.

Based on daily turnover averaging US$4-8 billion, India is on its way to becoming the third largest equity market in Asia Pacific behind China and Japan, and ahead of Hong Kong, according to a report released in August 2010 by Credit Suisse's Advanced Execution Services (AES) on the potential impact of SOR in India.

Retail participation has traditionally accounted for a major share of turnover, but Kataria notes that institutional investors, both domestic and foreign, have dominated equity trading in India over the past 6-8 months. He feels there has always been an even playing field between domestic and foreign brokers, although one issue faced by foreign institutional investors (FIIs) has to do with the onerous registration process. Earlier this year, SEBI amended instructions for filling applications for registration of a FII and sub-account of FII, with applicants required to provide additional declarations and undertakings along with the registration form.

“There are moves afoot to make the process of FII registration much simpler.

Although there has been a concerted effort to improve the process, more work needs to be done and is being done. Designating FIIs as one investor bucket and being able to register quickly at one window is all part of the drive to reduce registration time,” Kataria notes.