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ShareMumbai: Algorithmic trading, which uses software-based quantitative programs to identify and execute trades in the stock market without human intervention, is rising from the ashes.
Hugely popular in the US but still in infancy India, "Algo" trading fell victim to the September crisis, last year.
The 3-month old rally in the equity markets is spurring interest in this non-human, lightning-fast transactions and take advantage of minuscule differences in share prices.
Foreign brokers are leading the way. Last week, Credit Suisse launched an algorithmic trading platform called AES (acronym for advanced execution services).
Other brokerages such as Citigroup Global Markets are planning a launch soon in India.
While local investors may take time to embrace the product, overseas investors, especially institutional players such as quant funds and hedge funds using arbitrage and directional strategies will be the key users, said experts.
A considerable chunk of proprietary trading of brokers is also likely to migrate to the algo mode, people watching the developments say.
"Sophisticated liquidity-seeking algorithms will help deliver better execution to clients trading Indian equities," said Brook Teeter, head of AES sales for Asia Pacific, Credit Suisse.
"Investors will be able to automate their trading strategies and customise the algorithms to serve their objectives. This will help them reduce signaling risk and market impact and to access liquidity at the optimal price." Besides Credit Suisse, foreign brokers like CITIgroup are eagerly looking at the opportunity.
Aditya Narain, managing director and head - India research, Citigroup Global Markets, said Citi is looking at the "huge opportunity" and will soon enter the space.
The platform providers are also looking forward.
Athul Kudva, director at Omnesys Technologies Pvt Ltd, a firm that provides trading platforms, said one could see a lot more happening in the space over the next six to twelve months. "Over the next twelve months, 15% of the total volumes on the proprietary side could be through the use of these programs," he said.
Algo trading was not allowed by the Securities and Exchange Board Of India (Sebi) until the first half of 2008. Sebi opened the doors through the introduction of direct market access (DMA) by which institutions can directly place orders in the markets without relaying instructions through their brokers.
There was a lukewarm response to it with the equity markets themselves were going through a tough time.
Before it sank, Lehman Brothers' India unit became one of the first to launch the algo trading platform for its clients in August 2008. With Lehman's subsequent collapse and the resultant world crisis, even the few firms that had any plans shelved them.
Though things are looking better, there are concerns due to high transaction costs and liquidity.
Sridhar Vaidyanathan, COO at Geojit BNP Paribas Financial Services Ltd said the cost of using direct market access is higher when compared with other more developed markets where the costs can be 1-2 bps as opposed to 5-8 bps in India.
"But as more and more liquidity comes in the cost of trading through such avenues will come down," he said.
The momentum is building and there is a lot of interest.
"The use of algorithmic trading does put us on par technologically with the more developed markets in the world. But there is an issue with the liquidity that such systems need to operate with. Many of the lower- end companies in the BSE 100 also have scarce liquidity," said Saurabh Mukherjea, head of Indian equities at Noble Group. In the traditional method of trading, if an institution wishes to buy shares of a company, he informs his broker.
The broker examines the list of shareholders of the company and might approach them to match the sale. Thus, he plays the role of an intermediary who can help make a transaction which might not immediately be at hand, also take place.
In programmed or algorithmic trading, buy orders will be matched with existing sell orders, leaving no room for a sale to be created.
The absence of sufficient liquidity in the Indian markets means that there may not be corresponding orders for the algorithm to match.
The free-float, or amount of shares available for public trading, of companies needs to increase feel experts pointing out that Indian markets are among the most illiquid of the ten largest markets in the world. There is still plenty of room for programmed trading in some cases where there are opportunities that a computer might be more efficient at spotting than a human trader.
