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Algorithmic trading in India across the cash and derivatives market as a percentage of total turnover has increased up to 49.8% in eight years from merely 9.26% (average) in 2010. In March this year, 44.8% of the cash market volume and 48.2% of the equity derivatives market was driven by algo, showed NSE data. On the BSE, 37.22% of trade in March 2018 was driven by algo trading.
The daily turnover of equity market is around Rs 25,000 crore to Rs 30,000 crore, and in the F&O market, it is around Rs 3.5 lakh crore to Rs 4 lakh crore on a daily basis. However, as far as awareness of the retail investor is concerned, it is less in India. This is mainly because it requires specialised skills in addition to tools.
Sebi’s recent announcement on steps for strengthening algo trading through shared co-location has boosted the sentiments of algo solutions providers.
Experts believes that in the near future human-machine interaction could go to the next level. Through Deep Learning, AI, algorithms will self-correct and adapt to dynamic markets. Algos will be everywhere, in HFT, mid-to-low frequency, arbitrage, scalping, hedging, market making and anything you can define to a machine.
The efficiency of almost any trading done on the exchanges can be improved by leveraging technology. Automation of the trading process not just improves the efficiency of the trading participants, but also improves the efficiency of the market itself — arbitrageurs use automation to rectify pricing anomalies; and market makers use the power of technology to improve liquidity by providing continuous buy and sell quotes which automatically adjust to events and risks in the market.
In a bid to relax algorithm trading norms at commodity derivatives exchanges, markets regulator Sebi today raised the limit to process up to 100 orders per second by a user for such trade from the existing limit of 20 orders per second.
The decision has been taken after receiving representations from exchanges along with views of Sebi’s sub committee — Commodity Derivatives Advisory Committee.
“It has been decided to permit exchanges to relax the limit on the number of orders per second from a particular … User-ID up to hundred orders per second,” Securities and Exchange Board of India (Sebi) said in a circular.
The markets regulator asked exchanges to ensure that the limit it provides is subject to its ability to handle the load.
Besides, the regulator has decided to do away with the requirement of empanelment of system auditors by the exchanges for system audit of algorithmic trading.
Algorithmic trading or ‘algo’ in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade, and it is mostly used by large institutional investors.
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With several amendments over the years, India provides a good opportunity for Algo traders due to a number of factors such as co-location facilities and sophisticated technology at both the major exchanges; a smart order routing system; and stock exchanges that are well-established and liquid.
Algo trades account for over 43% of India’s stock market turnover. In the US, where retail investors also engage in Algo trades, 90% of the turnover is from automated systems. The global average is 75%.
SEBI was among the first regulators to issue a discussion paper proposing strengthening of rules on Algo trading in August 2016.
With rules in place, Algo trades in India will rise to the global average, market participants said. There are a lot of startups in this space waiting to enter once rules are in place. This will be a big boost for Algo trading.
Exactly a year after strengthening regulation of the 13-year-old commodity derivatives market, the Securities and Exchange Board of India (Sebi) has taken the first steps towards its growth by allowing exchanges like MCX and NCDEX to launch options in commodities.
Also, it has expanded the list of notified commodities that exchanges can launch by adding to it eggs, diamonds, skimmed milk powder, tea, cocoa, pig iron, biofuels and brass.
Sebi will spell out the details of the type of options and the products on which they can be launched in due course. An advisory committee constituted by Sebi after erstwhile commodity regulator FMC was merged with it on September 29 last year had recommended launch of gold and refined soya oil options initially.
The introduction of new commodity derivatives products is considered to be conducive for the overall development of the commodity derivatives market, attracting broad base participation, enhancing liquidity, facilitating hedging and bringing in more depth to the commodity derivatives market,” Sebi said in a circular. “The commodity derivatives exchanges willing to start trading in options contracts shall take prior approval of Sebi for which detailed guidelines will be issued in due course.”
Other important regulations are allowing equity exchanges like NSE and BSE to launch commodity futures segment and commexes like MCX and NCDEX to launch equities and currency segments.
Sebi will also enable margin fungibility by permitting merger of a commodity subsidiary of a brokerage with itself. In time, other products, like indices, and institutional participants like mutual funds, FPIs etc could be allowed to deepen the market.
Indeed options comprise 75% of NSE’s total derivatives turnover of Rs 404 lakh crore in the fiscal year so far. Average daily turnover of equity derivatives on NSE has been Rs 3.31 lakh crore against just Rs 25,000-30,000 crore for MCX, NCDEX and NMCE, where only futures are traded and institutional participation disallowed.
Since delivery is envisaged, the type of option could be American style though markets have crossed their fingers. “European styled options are being traded in Indian equity and currency derivatives markets, American styled options for commodities are in vogue in developed markets like CME. We are awaiting guidelines from Sebi to decide on the product type,” said Mrugank Paranjape, MD, MCX.
“For farmers, it (options) will be a game changer,” said Samir Shah, MD, NCDEX. “It would help them to sell their produce in the derivatives market and thereby get the benefit of price protection in case the price falls below their cost of production and also derive the benefit of any rise in the price. Options are also a much better hedging instrument as compared to futures for hedgers.”
Source – The Economic Times.(September 29, 2016)
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