BSE plans trading in commodity derivative segment

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Leading bourse BSE on Saturday has said that it plans to launch commodity derivative segment which will allow trading in metals and has approached market regulator Sebi for approval.

“BSE plans to set up a commodity derivative segment as soon as approvals are in place. It would consist of non-agricultural commodities like metal, oil and gas,” BSE Managing Director and CEO Ashishkumar Chauhan said.

Post the merger of the capital market regulator Sebi and commodity market watchdog Forward Market Commission (FMC), the exchange members need not create a separate subsidiary to start commodity trading.

“As and when that (merger) process is complete, our members can trade in commodities. Earlier, they had to open a separate subsidiary to become member of commodity exchange.

Now they are allowing us to trade as part of BSE as and when the approvals come,” Chauhan said.

At present, there are two major national and six regional bourses which offers commodity futures trading in the country.

As BSE completes 140 years of operations, Chauhan said BSE wants to position itself as “investment bourse” of any type of asset class rather than just be confined to being an equity trading platform.

He further said that they have got board approval for setting up of an international exchange in Gujarat’s GIFT City.

“We will apply to regulator Sebi. This is first time that an international finance zone is set up and we plan to offer all asset classes which will include equity derivative, currency derivate, interest rate derivative, and international and domestic commodities in the international exchange,” he said.

The new exchange will also help global companies raise finance from other overseas investors.

“We want to raise funds for Indian companies and foreign companies using international finance zone. For international finance zone to succeed and compete with Singapore, Hong Kong and others we need to ensure that it is able to provide all options under one roof,” Chauhan said.

He said the planned international exchange would be a BSE subsidiary through which companies can raise funds through issue of depository receipts.

“Currently, we are in the process of discussion with MCA and others what names are available,” Chauhan said when asked what would be the name of the new exchange in the GIFT City.

GIFT city, situated in Gujarat, caters to India’s large financial services potential by offering global firms a world—class infrastructure and facilities. It aims to attract the top talent in the country by providing the finest quality of life all with integrated townships, IFSC and multi—speciality special economic zone.

 Source – The Hindu (July 9, 2016).

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Algo trading turnover at a historic high on popularity

Algo trading turnover at a historic high

With increasing volatility in the equity markets and stiffening competition among brokerages, more and more institutions are adopting technology to use algorithmic and high frequency trading (HFT) to stay in the race.

According to stock exchange data, algorithmic trading accounted for 14.94% and 20.78% of total cash market turnover on BSE and NSE, respectively, in February 2013.

According to BSE, the share of algo trading has never been so high before.

While NSE declined to share the historical data related to the share of algo trading, information on BSE website clearly shows that algos have gained immense popularity in the recent months. For instance, algo accounted for less than 10% of the total turnover in December last year and stayed in the range of 5-8% for most part of 2012.

Algo trading refers to the use of computer programs to execute trades in the stock, commodity or other financial markets. These programs execute trades as and when the pre-defined parameters related to price, timing, quantity are triggered. Complex trading strategies can also be implemented using algos.

Market experts say that technology — by way of algo-based trading and HFT — continues to play a big role in changing the brokerage industry as it helps in executing orders in fraction of a second with utmost efficiency, accuracy and without human intervention.

“Technology is playing a huge role. It might replace human beings one day, although not completely. If the same task could done with the help of a machine in more efficient and time saving manner, why would you not invest in it?”

Market experts said that these software have advanced in such a way that one can do derivatives rollover by a click of a button. “Earlier a dealer had to sit in front of the screen and manually feed the order. It was time-consuming and a costly affair”.

“Proprietary desk of international brokerages the world over wanted DMA into Indian equities so that they could punch their orders using algos without the need of a broker in India…While the concerns raised by the market regulator are appreciated, I do not think the regulator can take a step back.”

The RBI had highlighted the risks attached to algorithmic trading in its June 2012 Financial Stability Report. The report stated that several instances of extreme volatility and disruptions were witnessed in Indian stock markets that could be directly and indirectly attributed to the increased use of algorithmic trading.

Algorithmic Trading Gaining Ground

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India is programmed to go the algorithmic trading way just like rest of the world since it helps to sidestep many ‘human errors’ that trip high volume traders adopting traditional trading methods.

The future of trading is in ‘programmed trading’ and India is heading the same way as other countries have been doing. Most of the day-traders lose money and it is estimated that 95 per cent of trading ended up in losses. While there is no assurance that by feeding the trading strategy into a computer, the success of it could be ensured, the chances of successful trading could go up. This is because many of the human weaknesses, like increasing the size of the order while smelling profit that would result in losses ultimately, will be eliminated and ‘that is the most important thing’.

No Human Emotion

The algorithmic trading is based on a programme written by an analyst or trader with parameters set earlier and it could be a jobbing programme or arbitrage trading etc. The advantage is that ‘human emotions will not play a part’ since the computer would execute the orders according to the programme.

It is a fully-automated process, no human intervention is needed and it is ‘away from sentiments’. The traders could do the trading in cash segments, F&O segment etc and the trading could be done in different scrips and there is the facility of putting stop loss too. The volume buying could be done at different price points giving the buyer the benefit of cost averaging and the buy/sell could be done in micro seconds. The high volatility the markets have been witnessing in the past six months has given greater opportunity for algorithmic trading.

While algorithmic trading facility is available in both NSE and BSE, because of the huge trading volume in NSE, more trades are taking place in that exchange. But one could buy in one exchange and sell in another. The algorithmic trading helped in improving liquidity and the traders could fix their own targets for buy or sell, which could be executed automatically.

Algorithmic trading is more suitable for trading in frontline stocks that had ample liquidity because when a sell order was generated, it should be executable. For HNIs, who have on hand a large volume of shares, they could set different price points for sale to average the selling price; and greater the market volatility, the greater is the opportunity in automated trading.

Algo Trading in India – Statistically Speaking !!!

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Algorithmic trading is all the rage in India right now, and across the market the view is unanimous: the only way is up. The question is how just fast it will grow.

By the start of 2012, Algo accounted for some 24 percent of cash equities turnover in India and about 30 percent of equity derivatives. According to figures from the Bombay Stock Exchange, by far the smaller of the two Indian exchanges that dominate equities trading, the share for equity derivatives has already jumped to 45 percent since then.

Algorithms and High frequency trading are the hottest topics in the market – algorithmic trading and HFT itself, and now the regulations around it. This is what the majority of players in the market are focused on today.

India has the building blocks in place for a ramp-up. Co-location has been available from both the Bombay Stock Exchange and its bigger competitor, the National Stock Exchange, for 18 months. Both exchanges, and market observers, say their trading platforms can handle HFT. Direct market access is available. Smart order routing between the two exchanges has also been operating since August 2010.

The Indian regulator, the Securities and Exchange Board of India (SEBI), produced guidelines for algorithmic trading in March which brokers, exchanges and market watchers hail as a sensible response. The new rules, they say, recognise that algorithmic trading is a natural development and are aimed at preventing problems but not blocking growth.

“All the dynamics point to an increase in automated and algo trading in the next few years,” Expect the cash equities and derivatives levels to raise around 50-55 percent within the next year or so.

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For traders who are in the hunt for arbitrage opportunities in the market, we explain how algorithmic trading works. Algorithmic trading refers to automation of the process of placing orders by using a software that runs on mathematical programs.
One of the key applications of this software that runs on a coded algorithm is — arbitraging. Jobbers, who play on the price differences between the NSE and the BSE or spot and futures market, needn’t stare at multiple screens to identify an opportunity for arbitrage.

Quick spotting, precision in deciphering a trade’s worth and order execution speed are highlights of algorithmic trading. By avoiding human intervention algorithmic trading enables swift order execution.

Let’s now see how the algorithmic software works:

Step 1: As the opening bell goes, price feeds from different exchanges flow into the trader’s terminal.

Step 2: The algorithmic software monitors price ticker and will be in a constant search for opportunities to execute the set orders. On finding matching set of data, orders are triggered and they fly to the exchange in rapid speed.

Step 3: The order hits the exchange’s server and gets executed, sending back a confirmation to the trader.