V Balasubramaniam from the BSE talks about the changes the exchange has undergone in recent years including new technology and a move towards diversification.
The BSE (formerly known as the Bombay Stock Exchange) has witnessed dramatic change in the past few years. New management, new technology, a customer-focused outlook and a clear strategic shift to diversify the businesses of the exchange beyond just equity trading,have all started to have an impact. Central Depository Services (India) Limited (CDSL), which is 54% owned by the BSE, is performing well and pushing into new areas such as dematerialization and the record-keeping of insurance policies and academic credentials. BSE Institute, the 100%-owned education and training subsidiary, is expanding beyond its traditional Mumbai-base and becoming a truly national business.
Revival of the BSE Derivatives Business Without a doubt, the most dramatic change at the BSE since September 2011 has been the revitalization of the equity derivatives business. This revival did not happen overnight. It required a complete technology overhaul – abandoning a previously used derivatives trading system in favor of a re-vamped and upgraded integrated cash/derivatives system. It also required building back up its derivatives membership ranks with over 400 members in the derivatives segment. In addition, it was helped by the introduction of a new real-time risk management system (RTRMS) and new multi-asset collateral management software (CLASS). Finally, a low-cost cloud solution called Fastrade-on-Web (FOW) was introduced to reduce the initial cost of a new member interested in trying out BSE’s derivatives segment without a big investment in infrastructure.
In addition to all these developments, the new regulatory framework to allow liquidity enhancement incentive programs (LEIPS) for derivatives has undoubtedly had a big impact. The BSE has offered a series of LEIPS programs in index futures and index options to incentivize market-making in order to build longterm liquidity in these products.
The results have been encouraging. BSE’s volumes and open interest in equity derivatives have grown steadily since the fall of 2011. Currently there is an average volume in excess of two million contracts per day. With high participation that continues to grow, the SENSEX index option contract clocks the highest volumes daily (approximately US$6 billion).
BRICS Exchange Alliance On 12 October 2011, executives from the stock exchanges of the BRICS countries (Brazil, Russia, India and China) convened at the World Federation of Exchanges (WFE) meeting in Johannesburg to sign a memorandum of understanding (MOU) to form the BRIC Exchange Alliance. In the following months, five founding members of the Alliance – BM&FBOVESPA from Brazil, Open Joint Stock Company MICEX-RTS from Russia, BSE Limited from India, Hong Kong Exchanges and Clearing Limited (HKEx) as the initial China representative, and JSE Limited from South Africa – finalized an agreement to expand their product offerings beyond their home markets and give investors of each exchange exposure to the dynamic, emerging and increasingly important BRICS economies.
Brian Ross of FIX Flyer talks to Buy- and Sell-side presenting the latest lessons on high frequency trading and algorithms from the Indian market.
India’s capital markets are experiencing increased interest from local and global firms and new rules are set to attract high frequency trading (HFT).
The capital markets regulator, the Securities and Exchange Board of India (SEBI), the exchanges, brokers and many investors are in favor of abolishing Securities Transaction Tax (STT). Eliminating STT will have a positive impact on market turnover, will help high frequency traders to be more profitable and, at the same time, narrow spreads should drive up trading volumes.
STT has been levied for all trades, domestic or foreign, on all transactions in either equities or derivatives markets since 2004. At the time, the purpose was to generate tax revenue and to protect market integrity by slowing down the pace of technological advancements of a few, well-funded players. Revenue generated by STT amounted to around USD 1.5bn in 2011.
It is widely expected that STT will be eliminated this spring, bringing new opportunities for HFT in one of the world’s biggest and fastest growingcapital markets.
To better understand the situation, we asked five panelists who are leading the charge in HFT in India, to share their insights with us.
You never forget your first algo. When you first got involved in algorithmic trading, what problem were you trying to solve? What was your decision process, and what technologies did you use?
Sanjay Rawal, Open Futures: We started off using algos for trading purposes and the first one we built was for a specific type of arbitrage that was getting difficult to run using manual input. We used third party software for the exchange connectivity and wrote our algo in C#.
Vishal Rana, IIFL Capital: My first experience with HFT was trying to create a straight-arb model on a real-time basis. Although it was a simple model, the most difficult thing was to clean the data. We got the data dumps and it took a lot of effort to clean it. Most of the coding was done using C++.
Rohit Dhundele, Edelweiss: At the onset of the project, the easiest yet most important task was gathering the business intelligence to be subsequently converted to algorithms. Some of the more intricate decisions were the selection of order, execution and risk management systems to ensure a stable back-bone to the platform. Other equally important criteria were a flexible programming environment and a friendly interface for users. To achieve these objectives, we had to decide whether to build or buy this technology.
At Edelweiss, we realized relatively quickly that there is a sweet spot between the two extremes of in-house vs. outsourced solutions. We have since been following this model – combining the best of both worlds, which has helped us deliver customized solutions within acceptable turnaround times, whilst still protecting our IP.
Sanjay Awasthi, Eastspring Investments (Singapore) Limited: In the Indian markets, propelled as they are by rapid information dissemination systems, anonymity becomes a key factor in determining efficient trading. It was this need for anonymity that propelled us towards algorithmic trading. Continued use and familiarity lead to further benefits by way of better execution control. Algorithmic trading has thus become an important part of our execution arsenal.
Chetan Pandya, Kotak Securities:
The first algo I worked upon and put in production was calendar rolls for derivatives. Our trading desk had huge positions to roll from the current month to the next and manual execution was leading to slippages and erroneous executions at times. Using the 2 legged order of NSE we created a simple algorithm which would roll the position at desired spread.
My first observation regarding algorithmic trading was to appreciate the difference between an individual trading manually versus a machine trading automatically. There are so many things that come naturally to a human being but needs to be told to the machine. Sometimes I wonder whether an algorithm can fully replace a human being ever. There are those nuances of the market and events that lead to erratic market behaviour that cannot be fully programmed for reaction.
Also, I had to ensure that there is no room for error when you are trading using an algo platform, primarily because of the sheer number of orders that it can process in a single second and also the inability to spot something going awry with the naked eye given the sheer speed. Hence, I had to also think of risk management capabilities of the Algorithmic platform while needing to ensure that risk management does not lead to inefficient execution due to latency.
In terms of technology, we were limited to applications that conformed to our market regulations. Once we had the base framework and architecture ready, we integrated it rapidly with our existing applications for order routing and downstream workflows.
RCM’s Head of Asia Pacific Trading, Kent Rossiter, points out some of the good and bad of Indian SOR and reflects on Hong Kong market structure.
Are Smart Order Routers (SORs) in India working well?
SORs sure are working in India. I am not sure what is more of a raging success in the Asian equity SOR world, India or Japan, but the cost savings estimate numbers we are hearing are evidence enough to suggest that Indian SOR development is a big plus.
For ages, there have been two meaningfully big markets; the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Up until a year ago, when Securities and Exchange Board of India (SEBI) opened the playing field up, investors who wanted the liquidity of both had to do so by manually monitoring their screens. This was painfully labor intensive and with the thin displayed liquidity of bids and offers, difficult to actually execute. You would often find fills from one exchange or another being executed at inferior prices to the other as a dealer had their eyes off the ball. Those executions were inevitably followed by a conversation with a dozen excuses. I would be told what I was seeing on my screen was not the real situation, but a latency delayed picture.
For the most part we are only using brokers with SOR for our Indian executions, and these brokers co-locate servers so latency is no longer a concern. We are getting fills at the best prices available and from two pools of liquidity where we may have only had one in the past. Only if the order is really small would we limit ourselves to one exchange in an effort to save on ticketing charges.
SOR is just the most recent visible step in the broader trend of the evolution of markets. Accordingly, the buy-side and sell-side traders have to educate themselves and keep up.
What are the issues with Indian SOR?
It is the lack of interoperability at the post-trade clearing level that has limited the true savings many investors would have benefited from otherwise. This is a challenge that SEBI continues to address. The lack a central clearing counterparty for the NSE and the BSE causes settlement costs to be about twice what they would be if only one exchange were used, and this is a consideration for most institutions when deciding whether or not to use two exchanges. If the exchanges and SEBI could reach a solution in terms of interoperability arrangements for SORs, the cost savings and benefits of SOR usage could be passed to the end users. Until then, its true potential remains yet to be uncovered.
Stephanie Lawton reports on the latest from the Face2Face Forums in Mumbai and Kuala Lumpur.
Few exchanges have seen such dramatic transformations as those in India. Technology looks set to play a major role in meeting market demands with the BSE announcing its adoption of FIX 5.0 and the NSE using FIX 4.2, with plans to upgrade to 5.0 as needed. Both the NSE and BSE seem determined to not only meet, but exceed their members’ expectations and have aggressive plans to build on existing capabilities and develop new products. Bringing together the Exchanges Three exchanges (NSE, BSE and MCX) came together to debate the role of technology, regulators and, of course, competition.
Jim Shapiro, head of market development for the Bombay Stock Exchange (BSE), stated that the ability of an exchange to innovate and stay ahead of the market, would be the key to its success. Correctly reading how the regulators may react to situations and evolve regulations in India would also be key, he added. Vidhu Shekhar, vice president of new products for the National Stock Exchange of India (NSE), agreed that keeping pace with market growth was essential. “You need to keep your eye on the ball,” he urged. “We need to recognise what’s going on outside India and decide how we, as an exchange, respond to the challenges and opportunities of globalization.”.
Latika Kundu, head of market operations for the MCX-SX, focused on the role of technology. “It’s about awareness of products on the market and how we ensure maximum accessibility to these new products,” she argued.
Looking at the progress of DMA and automated trading, the BSE felt the process was still in its infancy, with DMA still showing market constraints. However, algorithms were attracting a lot of interest from most market participants. New players, in particular, were ramping up this aspect of their technology and product offerings, with the BSE keen to attract these new market entrants.
On the subject of regulatory changes, all the exchanges agreed that the regulators had come a long way in engaging with the market and the exchanges. The main concern centered on systematic risk and in better understanding their clients’ requirement. On the idea of a MiFIDstyle system, the exchanges said that though the issue of best execution was being actively discussed, it still remained a complex issue. According to Shapiro, dark pools wasn’t high on the regulators’ priority list and block trading provoked more interest.
The Keynote – High Frequency Trading
High Frequency Trading as the New Market Makers was addressed by Ronald Gould, Chief Executive Officer, Asia- Pacific, Chi-X Global.
To start his presentation, Ron questioned whether High Frequency Trading is ‘bad’ or just ‘badly understood’. He gradually unfolded the story by looking at the development of HFT in the US and Europe in terms of regulatory evolution and the technology arms race. He also illustrated that an Alternative Trading System (ATS) has a positive impact on trading volume, which was reflected by the explosion of trading activity in Europe and in the U.S. He predicted that Asia-Pacific markets will undergo many of the same changes as the U.S. and Europe with HFT will playing a critical role in many existing Asia-Pacific markets with relatively low liquidity.
What are the major issues for electronic trading in India?
The major drivers were still the foreign institutional investors that were showing a strong appetite for algorithms, explained Murat Atamer, vice president equities, at Credit Suisse AES. “FIXatdl would be attractive to our clients,” said Atamer, adding that India was not a market that should be traded without algos.
When I accepted a job in the Indian financial markets six months ago, my thinking was simple. First, I believed (and still believe) that India has an once-in-a-lifetime opportunity to pull away from the pack and establish itself as the largest and most dynamic financial market in Asia. Second, I thought I could contribute to the efforts of my new employer to compete more effectively and grow its business.
I expected to draw on my experience working at and for exchanges in the US and Asia for more than two decades. I also expected to draw upon my training in finance and economics. What I did not expect, was that I would find myself regularly reaching back to wisdom and inspiration from books I had read in college – particularly the inspiration and observations of US revolutionaries and civil rights heroes. Let me explain.
From most perspectives, the opportunity in Indian financial markets today is spectacular. There is the confluence of factors that – unless some or all of them are seriously derailed – will allow Mumbai to emerge as a major global financial center.
First, India has the virtue of a large domestic market. In Asia, this gives China and India, a big advantage over Singapore and Hong Kong, today’s front-runners in the race to become Asian Financial Centers.
Second, the Indian economy is growing rapidly and this growth, because of India’s early stage of development, is likely to continue in the 6-8% range, and quite possibly the 8-10% range, for the next decade. Even if the size of India’s financial sector relative to GDP stays constant, it will double in absolute terms over the next decade, assuming 7% growth. A much more likely scenario, however, is that we will see dramatic financial deepening in India over this time period.
Third, India already has much of the basic financial market infrastructure in place. Admittedly, there are a few gaps – such as a vibrant “Stock Borrowing and Lending” market. And there is always room for improvement – especially when it comes to coming more into line with global best practices and standards. But, most would agree that India’s financial market “plumbing” is working well. In terms of trade processing in the equities market, for example, Indian exchanges match, clear and settle a phenomenal number of transactions each day – putting both BSE and NSE easily in the top ten globally.
Fourth, India has a reasonably effective and transparent regulatory environment – focused on investor protection and market development. Regulators are appropriately cautious in some areas. The focus has been on risk management and the gradual introduction of new products. This has generated some frustration at times for market participants who want regulatory changes to come more quickly. But, by and large regulations are evolving well, taking into account the views of the market, international practices and Indian ground realities.
Fifth, Indian financial markets are quite open to foreign participation. While there are some notable impediments — for example, restrictions on foreign retail investors – it remains true that offshore participation by foreign institutional investors (FIIs) is substantial. More significantly, if a foreign securities firm wishes to come “onshore” in India, it is to a very large extent free to compete with domestic firms. The benefits from this foreign participation, in my view, have been substantial, bringing global practices, global talent (much of it Indians working at foreign firms), and global competition into the market.
Sixth — and most relevant to my comments here – India has a competitive exchange environment that will be a critical factor in lowering trading costs, increasing liquidity and driving the development of the markets through innovation.