A few days ago i had asked the following question on linkedin:
Do you think Indian Stock Markets are mature enough for Automated Trading ??
Automated trading in US and UK is not a new phenomenon. The term high frequency trading may be relatively new to indian brokers, but in US and Europe, it started more than 10 yrs ago.
Nothing to blame on indian markets, which have just gone into demat format a few yrs ago. So naturally, we had to get opportunities in algo trading v late compared to US/European markets.
So, my question here is: Do you feel that indian markets are mature enough to give the liquidity and volatility for Automated trading. If yes, why ? If No, when you think the markets will offer such opportunities.
I received 5 replies for my question. Here i am publishing the best response as per my knowledge of automated trading. Pls feel free to comment on my question.
I would assume your question is about Algorithm trading and HFT introduction in Indian markets.
As you have said we have not matured in term of market structure to move into these sophisticated means of trading. In my personal opinion here are some of the prerequisites that need to happen –
1. Volume needs to increase (India our daily share volumes should be couple of million viz. US it about 10Bn / day)
2. Spread (bid/ask ration) has not become so thin as in US markets
3. In the passing decade market venues have increased in US from 2 to something like 40, thus creating the problem of liquidity fragmentation. We still are grappling with 8hr trading window with two exchanges… for now forgetting dark pools, ECNs, ATSs
4. One more thing is liquidity moves from one venue to another like a wave across US markets in milli/micro seconds… to capture this liquidity we definitely need to move into the realms of HFT, SOR , Algo trading
5. In the literal sense we don’t have market markers in the Indian context… someone like Madoff securities, Knight capital in the US context are non-existent in our securities market
6. Even in terms of revenue model of the B/D (in US)….there is significant pressures on the commission the B/D collect from investors… revenue from execution only model has been peeny+ized …. While execution+ model has some margin left with them still, as this come with value added services to the investor. So B/D don’t want to incur opportunity cost in not liquidating any small spread that may come up in the various market venues
7. Trading strategies have evolved more towards quant models which are beyond the human traders ability…thus crossing over to the Sci-fi region where machines are better than human traders
8. As you have stated volatility is also a contributing factor for the introduction of HFT & Alog trading. To quote, one of the main reason for Algo and HFT to take a lion-share of the trading techniques in the US market, last year(2009) was the high level of volatility in the penny range($0.001) the investors experienced
Hope this gives a sense of what needs to happen in term of market structure in India viz US.
- Rajasimha Makaram
Feel free to write what you feel about how automated trading has come along in India and how is the future for auto-trading in India.