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Algorithmic trading, or algo trades, has seen an uptick on account of increased participation from institutional investors.
In 2014, the share of algo trading grew by 12 per cent on the BSE. High speed trades account for nearly 46 per cent of the total on the National Stock Exchange (NSE) and about 30 per cent on the BSE. Market players say increase in algo trading is on the back of higher participation from institutional investors.
“People are moving away from manual trading to algorithm-based trades, as they are better at matching orders. The use of algo technology makes trading more efficient. Last year, we saw exchanges also upgrading technology for allowing faster trades,” said Kunal Nandwani, chief executive of uTrade Solutions, a financial trading technology company.
Algo trade is used largely by institutional investors, including hedge funds and arbitrage traders. Market players say a lot of domestic participants these days are relying on algo trades. The improvement in the outlook for the economy led to a surge in confidence among investors, particularly domestic one who had stayed away from markets in the past three-four years.
Last year, for the first half of the year, buying by DIIs (domestic institutional investors) remained muted. However, it saw a sharp rise during the second half, with both domestic mutual funds and even some insurance entities returning to the market.
Exchanges have been improving on existing algo technology like boosting the response time for order matching. The BSE last year reduced its trade response time to 200 micro seconds and hopes to bring it down further to 20. Reducing the response time helps in faster and more efficient matching of orders. “Exchanges are reacting to the demand created by institutional investors for faster matching. There is a demand for faster trades, especially in the futures and options (F&O) market, which is more complicated,” said Deven Choksey, managing director of K R Choksey Securities.
Most of the algo trades in the market are concentrated in the derivatives segment, which accounts for nearly 95 per cent of equity trading volumes.
The portion of algo trading in India is still below the some of the developed market.
As per industry estimates, algo trades in the US markets make up for nearly 70-80 per cent of all trades, while in Europe the number is closer to 60 per cent. Industry officials believe algo trades could account for as much as 60 per cent of all trades in the market in the next two years.
Liquidity is another factor that enhances the efficiency of algo trade. As more and more stocks and instruments get included in the F&O segment, liquidity in the derivatives segment would also receive a leg-up, further pushing the demand for a faster order-matching system.
Analysts said the 15-minute pre-trading session, known as the pre-open call auction, is when algo trades gain most significance because the traffic at that time is very high, as it sets the mood for the rest of the trading session. “In the first 15 minutes, there are arguably more trades coming in at that time of the day. Of course, the rest of the day is also fairly competitive,” said Nandwani.
The indigenous algo trading landscape consists of a few niche players like brokerages, which develop the technology in-house or smaller firms which develop the platform and sell it to various brokerages. As market performance improves, more players are expected to enter the market, bringing newer technology, analysts said.
