NSE algorithmic trading to be faster from Jan

The National Stock Exchange (NSE) is set to launch its co-location facility with 50 members early next month. “We will be allocating the space on a first-come, first-serve basis and plan to have it running in the first few weeks of January,” an exchange official said, preferring anonymity.

Co-location is a facility extended to members who are engaged in direct market access (DMA) or algorithmic trading. While DMA allows orders to execute through brokerage systems but without brokerage intervention, algorithmic trading allows for transactions through computer programmes. Market sources suggest the Bombay Stock Exchange is also considering co-location facilities for its members. However, it is likely to take place later than January, a person in the know said.

Both DMA and algorithmic trading make use of strategies that exploit short-lived market opportunities and have a high dependence on speed of execution. The time intervening the sending of an order and its receipt at the other end is called latency.

The closer you are to the exchange, the lesser your latency and better your operations. With this in mind, some members who were involved in DMA and algorithmic trading were pleading for a co-location facility.

Following this, the NSE had issued a circular on August 31, inviting members to set up their DMA and Algo IT infrastructure at NSE premises in the Bandra Kurla Complex.
Members would have to pay a fee of Rs 22.5 lakh for the facility with an additional Rs 1 lakh to be paid as initial setup charges. Additional charges would have to be paid for greater speed of connectivity, basic IT services and back-up storage.

Physical access to these facilities would be restricted to initial setup and periodic or urgent maintenance as and when required. Permission would have to be taken from the exchange for the same and it would be allowed only after exchange trading hours.

“This can help in bringing in algorithms that work on shorter time spans as the period for travelling for the signal would be reduced,” said Anand Tandon, director of equities at BRICS Securities.

“This facility will provide faster execution capabilities to its DMA clients who trade using
algorithms. The proprietory traders in the market are also likely to opt for this co-location option,” said Narayan S A, managing director, Kotak Securities.

It might be some time before the difference is felt among brokers who provide algorithmic trading and DMA. “At this point in time, this move does not matter at all. A lot of algorithmic programmes face a problem of insufficient liquidity. There is little depth outside the Nifty universe, which reduces the efficacy of such programmes. A visible difference for the use of algorithms or speed-based traders seems unlikely,” said an expert, requesting not to be named.