The Business Standard has a story about program / algorithmic / high frequency trading gathering steam that caught my eye today.
The story reminded me of the High Frequency Trading uproar in the US a few months ago, and I think India is going down the same path as far as this type of trading is concerned.
Program or algorithmic trading is automated trading that is done by computers without any manual intervention, and is done at high speeds.
From Business Standard:
Algorithmic trading uses strategies that exploit short-lived market opportunities and depend highly on execution speed. Essentially, set software programmes decide when, how and where to trade, without the need for human intervention.
The story talks about algorithmic trading gaining currency in the last year and top brokers expecting it to continue momentum going forward.
A big part (or possibly all of it?) of program trading is arbitrage, buying and selling at high speeds and taking advantage of the price mismatch that exists in the market. As US Investment banks have shown, this is highly profitable too, so there is every reason to believe that Indian brokers are going to invest and scale up quite a bit.
In fact, NSE has already signed with 60 members to allow them to co-locate their servers close to the exchange servers.
From BS:
NSE has already signed with 60 members for a co-location facility, whereby they can place their trading servers close to the exchange’s engine for Rs 22.5 lakh on a first-come-first-served basis. Co-location saves crucial milliseconds from the time it takes to place an order and its receipt at the other end. The broker with his server next to the exchange engine gets a price feed that is updated every three-four milliseconds, while a broker at a remote place will get this feed updated every 30-40 milliseconds. SMC, which had applied for four rack spaces with NSE, was allotted two. It would be allotted the other two soon. Each rack can easily handle two servers, each of which can handle orders worth Rs 200 crore.
So, basically, some market participants will have an advantage in terms of being able to execute faster than everyone else and getting price information faster than everyone else. This is great for the broker who will make money out of this edge, and for the stock exchange which will make commissions on increased volumes.
To you and me, it is most probably a disadvantage, and when I first heard about this concept, – I wondered how is this even legal. But, that’s just how it is. At least until the next scam or market meltdown anyway.
IN simplest terms, this is nothing but undue exploitation & creation of uneven playing field. Interestingly, no response from the market watchdog (or regulator ! as some may prefer) is not mentioned. I can’t agree with you more on doubting the very legality of such a move, but at the very least, it is indeed an unethical practice.
WHile the financial regulators are trying hard (or are at least supposed to !) to create an impression that the market is inclusive, this move actually undermines it & only goes to show that it is heavily skewed in favour of the mighty few !
Yup, I also remeber reading the same thing. According to me only brokers will gain in it.
Yeah, big brokers are already lining up to get space from NSE to locate their servers and investing heavily in software development too. The ones who get in early in this game will have a better edge too.