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.
NSE has already signed with 60 members for a co-location facility, whereby they can place their trading servers close to the exchangeâ€™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.