I spent last week in
India, a country that, by any standards, is growing fast. Its population has doubled in the last
40 years to 1.2B and economic growth has averaged more than 7% per year since
1997. It’s projected to grow at
more than 8% in 2010. By some measures, India has
the 4th biggest economy in the world.
Progress has a
significant presence in India. In fact, people-wise, it’s the biggest territory
for Progress outside the US with over 350 people. Hyderabad is home to a big
development centre and Mumbai (Bombay) has sales, marketing and a professional services
The primary purpose of
my visit was to support an event Progress organised in Mumbai on Thursday of
last week on the subject of algorithmic trading. It was also our first real
launch of Progress and Apama, our Complex Event Processing (CEP) platform, into
the Indian capital markets. We had a great turnout, with over 100 people turning
up. I spoke about what we did in capital markets and then participated in a
panel session where I was joined by the CTO of the National Stock Exchange, the
biggest in India, a senior director of SEBI, the regulator, and representatives
from Nomura and Citigroup. A lively debate ensued.
The use of algorithmic
trading is still fairly nascent in India, but I believe it has a big future.
I’ll explain why soon, but I’d like first to give some background on the
Indian electronic trading market, particularly the equities market, which is the largest.
The marketIndia has several,
competing markets for equities, futures and options, commodities and foreign
exchange too. In equities, the biggest
turnover markets are run by the National Stock Exchange (NSE) and the Bombay
Stock Exchange (BSE), with market shares (in the number of trades) of 74% and
26% respectively. Two more equity exchanges are planning to go live soon – the
Delhi Stock Exchange is planning to relaunch and MCX is also currently awaiting
a licence to launch. This multi-market model, only recently adopted in Europe
for example, has been in place in India for many years.
It was only two years
ago that direct market access (DMA) to exchanges was allowed. Although official
figures don’t exist, the consensus opinion is that about 5% of volume in
equities is traded algorithmically and between 15% and 25% in futures and
options. Regulation in India is strong - no exchange allows naked access and the
BSE described to me some of the strongest pre-trade risk controls I’ve come
across - collateral checks on every order before they are matched. The NSE has
throttling controls which imposes a limit on the number of orders a member organisation can submit per second. Members can be suspended from trading intra-day if this is exceeded. The NSE also forces
organisations who want to use algorithms to go through an approval
process. I’ll say more about this later. Controversially, the NSE will not allow
multi-exchange algorithmic strategies so cross-exchange arbitrage and
smart-order routing cannot take place. Lastly, a securities transaction tax (STT)
is levied on all securities sales.
So, with the above
restrictions, why do I think that the Indian market for algorithmic trading has
The Indian market is very
big. Surprisingly so to many people. Taking figures from the World Federation of Stock Exchanges (thus I’m not
counting trading on alternative equity venues such as European multi-lateral
trading facilities), the Indian market, in dollar value, may still be
relatively modest – it’s the 10th largest. However, when you look at the number
of trades, India’s the 3rd largest
market, only beaten by the US and China. The NSE, for example, processes 10
times the number of trades as the London Stock Exchange. So why isn’t more
traded in dollar terms? That’s because trade sizes on Indian exchanges are very
small. The median figure worldwide is about $10K per trade. The figure in India
is about $500 per trade, a 20th of the size. In summary, surely the task of
taming the complexity of this number of trades and the orders that go with them
is ideal for algorithmic trading to give an edge? To compare to
another emerging, “BRIC”, economy, that of Brazil, where the number of firms
using Apama has gone from zero to over 20 in as many months, the dollar market
size is fairly similar but the number of equity trades in India is 33 times
more. The potential in India is therefore enormous.
India is already there in other ways. All exchanges are offering
co-location facilities for their members and debate has already moved on to
that common in more developed markets on whether this gives certain firms an
unfair advantage or not and whether co-location provision should be regulated.
There are some
difficulties. The STT is seen by some as an inhibitor. However, its effect is
offset somewhat by the fact that securities traded on exchange are not subject
to capital gains tax.
process for approving algorithms is more controversial. Firms that want to
algorithmically trade must show to the NSE that certain risk safeguards are in place
and “demonstrate” the algorithm to the exchange. As the biggest exchange, the
NSE wields considerable power and thus its decision to vet algorithms puts a
brake on market development. I believe this process to be unsustainable for the
- As the
market develops there will simply be too many algorithms for the NSE to deal
with in any reasonable timeframe. Yes, India is a low-cost economy, but you
need highly trained people to be able to analyse algorithmic trading systems. You can’t simply throw more people at this. Firms will want to change the
way algorithms work on a regular basis. They can’t do this, with this process
- It raises intellectual property issues. Brokers will increasingly object to
revealing parts of their algorithms and their clients, who may want to run
their alpha seeking algorithms on a broker-supplied co-location facility, will
most definitely object.
- It puts
the NSE in an invidious position. Eventually an algo will “pass” the process
and then go wrong, perhaps adversely affecting the whole market. The NSE will
have to take some of the blame.
will force the NSE’s hand. The BSE is trying to aggressively take back market
share and other exchanges are launching which will not have these restrictions.
It strikes me that the
NSE should spend its efforts into ensuring that it protects itself better. Perhaps
a reasonable comparison is a Web site protecting itself from hacking and denial
of service attacks. If they can do it, so can an exchange. And it would offer
much better protection for the exchange and the market in general.
I’m convinced of the
growth potential in India for algo trading. The market is large, the user base
is still relatively small and many of the regulatory and technical prerequisites
are in place. There are some inhibitors, outlined above, but I don’t think they’ll
hold the market back significantly. And finally, why should India not adopt
algo trading when so many other, and diverse, markets have?
Progress has its first
customers already in India. I look forward to many more.