The adoption of algorithmic trading by domestic institutions in India has had a slow start, but Edelweiss Securities is an exception, with the firm having launched a full range of algorithmic strategies over the past two years.
The firm also provides co-location and other technology support to enable high frequency trading from different geographical locations.
“We used to execute all our trades manually until about two years back. Over the last two years, we have adopted DMA and algorithmic trading pretty aggressively,” said Kunal Singh, the firm's vice president for algorithmic trading.
A leading domestic brokerage, Edelweiss Securities is part of the Edelweiss Group, which also has businesses in asset management and investment banking.
“Half of our orders now are executed via our algorithmic trading platform. It depends on the customisation level required and how easy it is to put that order in the machine. A lot of blocks are still traded by hand,” Singh added. “Between 75-80% [of orders traded algorithmically] will be the upper cap, because there will always be orders a human being will be better at. We think 75-80% automation is a fairly achievable target in the next six to eight months.”
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.
Only around a dozen brokers are estimated to have live SOR capabilities in India because of the length of time required for regulatory approval. In December 2010, Credit Suisse announced the execution of its first trades on the Bombay Stock Exchange (BSE) and NSE using SOR technology. UBS also expects to expand its SOR capability to the Indian market over the next few months. Daiwa Capital Markets, the investment banking arm of Japan's Daiwa Securities Group, also intends to expand its DRECT electronic trading and routing platform to India in Q3 2011, which will offer routing between the NSE and BSE.
SEBI is also reviewing options to remedy the lack of interoperability between India's two securities clearing houses, a problem that currently prevents some of the true cost savings that can be realised through using SOR. The regulator initially permitted SOR in India's cash equities markets in August 2010, which was followed by a further circular in December to clarify that routing between stock markets is allowed for all order types.
“We have tested a few SOR orders and over the next couple of months, we will launch our own. I expect that a lot of brokers will be SOR-compliant over the next six months,” Singh noted. “We've designed algorithms specifically for the Indian market taking into account the liquidity profile in India, cost structures, contract expiries and so on. On the execution side, we have different algorithms for cash and derivatives trading.”
Edelweiss started developing its algorithmic trading platform after the SEBI gave approval for DMA and algorithmic trading in late 2008, and launched the platform in January 2010. The firm's own programming team designed the algorithms, while its order management system is supplied by FlexTrade, a global provider of algorithmic trading platforms and execution systems.
“We now have the entire suite of algorithms. What we will be working at is client specific customisation. As the market changes, the modification and customisation will keep going on,” he added.
Author: Jill Wong