Algorithm trading, or ‘algos’, is a recent concept in India, introduced only a couple of years before. Yet, India has already started featuring high on the priority list of global vendors of technology that specialise in algo programming.
Giles Nelson, co-founder of APAMA, the leading platform in this regard, and deputy chief technology officer, Progress Software, expects the share of algo trades to go up exponentially in the next three years. “India is a good growth market and we are starting to see the beginings in India,” he says.
APAMA is a favoured platform for high-frequency trading applications, with 145 leading financial majors in the world among its users.
“Volumes will increase along with the increase in the size of the economy. Within three years, I would imagine up to 50 per cent will be traded algorithmically. It will increase further from there on,” said Nelson.
“APAMA has been successful in Europe, the US, Japan, Australia, Hong Kong and Brazil, which has been a fast-growing market. We now see potential for growth in India and we feel the time is right to invest,” he added. Progress Software, founded in 1981, is a US-based $500-million revenue company.
Algorithmic trading, in layman terms, refers to use of softwares designed to identify and carry out transactions on a real-time basis. An algo program provides its user speed and precision. For instance, an algo could break up a large buy order into smaller chunks and also decide the timing of the execution of each of the smaller lots so that the market price is not disturbed. Algo trading is most commonly used by large institutional investors as they buy large amounts of shares every day.
Progress Software is not the only algo vendor bullish on India. Some leading financial powerhouses, including Goldman Sachs, UBS and Nomura, have created specialised in-house algo development divisions and are looking at India in a big way. “Overall, India continues to be a high-growth and a high-focus market for electronic trading,” said Kim Man Li, head of electronic trading sales for Asia at Goldman Sachs, in a recent interview to Business Standard.
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“The majority of orders are still the more traditional, or plain vanilla, algorithms. That being said, clients have started exploring use of ‘advanced’ features and complex strategies within these algorithms. Onshore broker proprietary trading desks are utilising more advanced ‘statistical arbitrage’ strategies. And, with the advent of co-location in India, we will see more complex strategies, with a bias towards high-frequency trading,” says Kim.
Interestingly, the growing popularity of algos has also led to a rise in its criticism by a section of market players, who feel program trading increases the probability of ‘flash crash’. Algo proponents, however, deny this, saying that technology, if used within the parameters of the existing regulatory framework and with risk management processes in place, can benefit the investing community. “The use of technology is sometimes seen as injurious, but if used in the right way and regulated in the right manner, people can benefit through lower costs, which benefits everybody, including retail investors. It also brings more liquidity to the market,” says Nelson.
In a similar context, Goldman Sachs’ Li feels that given the additional care taken by exchanges and regulators in approving algorithms, “an accentuated move in prices caused by algorithms should not be a common phenomenon”.