Buy-side on Algos in India
Prudential Asset Management (Singapore) Ltd.’s Sanjay Awasthi , Director, Central Dealing Desk, discusses what he looks for from broker algos and the need for adapting algos to the Indian markets.*
How has SEBI’s approval of smart order routers changed your order flow?
We are not users of smart order routers because of the additional complexity resulting from the differences in the settlement processes amongst both the exchanges in India. An illustration of this complexity is in respect of the denoting of price by decimal places. While NSE has a 4 decimal place pricing, the BSE has a 2 decimal place pricing. This mandates a segregation of fills, which can result in difficulties, especially in a market like India where the average trade size is small and consequently, the number of fills is very large. Also, as yet, we have not really seen any significant advantages in the use of smart order routers.
Are your algorithms primarily developed inhouse or by your brokers?
At Prudential Asset Management (Singapore) Ltd, we rely on brokerprovided algorithms. However, from time to time we may request brokers to customize certain algorithms to help us execute trades in the best interest of our clients.
Do you use algorithms for trade execution, to spot opportunities or both?
Algorithms are used for trade execution. From a trader’s perspective, algorithms help to give greater control of the manner of the execution. In Indian markets, using algorithms ensures anonymity and gives better control on execution.
Is there a difference between the type of algorithms you get from Indian brokers and from international brokers?
Most broker algorithms are commoditized in the sense that the offerings across brokers are pretty much the same for a particular market. This however does not hold true across markets. Most standard algorithms need to be customised to match the market micro structure of each market. To illustrate, in India a volume inline/participation algorithm has to be tweaked to ignore block deals which go through in the normal segment.
What new algorithmic products or services would you like to see more of from your brokers?
We are quite satisfied with the existing algorithms provided by our brokers. In future, we would expect brokers to help customise the existing algorithms to suit our specific requirements which are essentially those of our clients’. This would also entail more research services from brokers on market micro structure.
Sell-side Perspective on Indian Algos: Rajeev Saptarshi, Kotak Institutional Equities
In a short time, algorithmic executions have changed the face of Indian markets. Thanks to progressive steps taken by the exchanges and the market regulator, SEBI, including the introduction and streamlining of Smart Order Routing, use of algorithms is expected to rise significantly, both in the agency as well as the proprietary space. Market players arealready beginning to feel the positive effects of efficiencies in the form of lower market spreads and higher volumes. The challenges posed by algorithms must be met by continuous innovation to increase efficiency, lower commissions, address higher upfront costs and market them to buy-sides. In the foreseeable future, we believe that domestic sell-sides will outdo their global counterparts in terms of effectiveness of algos and the ability to adapt to frequent changes in rapidly evolving technology in Indian markets.
*Prudential plc, incorporated and with its principal place of business in England, and its affiliated companies constitute one of the world’s leading financial services groups and has been in existence for over 160 years. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world. Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America.