India Algorithm Trading a Non-Starter as Bourses Fight
The broking community is unable to use algorithmic trading to take advantage of price differences between the two national exchanges—the 136-year-old Bombay Stock Exchange (BSE) and its younger rival, the National Stock Exchange (NSE)—as the latter does not seem to be keen on allowing multi-exchange algorithms, brokers allege.
While a section of the market blames NSE for not allowing such algorithms, NSE claims no broker is interested in applying for clearances for multi-exchange algorithms.
Traders have not been able to get approvals for arbitrage algorithms that exploit differences in prices of the same stock on BSE and NSE as the latter is not willing to approve the algorithms, said an algorithmic trader who declined to be identified, as most of his revenue came from trades on NSE.
Algorithmic trading is the use of computer programmes for entering trading orders, with the algorithm deciding the timing, location, price or quantity of the order.
Direct market access, in which these trading programmes can directly place orders in the market without human intervention, was first allowed in April 2008. Since then, algorithmic trading has grown rapidly in India, with around 60% of the order flow on NSE coming from co-located servers alone.
Co-location is a facility provided by exchanges that allows brokers to keep their automated servers on the exchange floor to place orders directly to take advantage of latency.
In case of BSE, an algorithmic trader needs to inform the exchange if he is using algorithms, but in case of NSE, the process is more stringent, with prior approval required for any algorithm.
While 15-odd brokers have got approval from bourses for smart order routing (SOR), other kinds of multi-exchange algorithms have not taken off yet.
SOR is a mechanism that helps investors get the best price for their transactions across exchanges by routing orders to the bourse that offers the best price.
“We have several multi-exchange platforms and algos (algorithms) available, but a trader needs to take approval from two exchanges and that is a problem,” said Shrikant Pandit, chief executive officer of Omnesys Technologies Pvt. Ltd, a software vendor partly owned by NSE.
Another software vendor, who did not want to be identified, said he has been discouraged from selling multi-exchange algorithms by NSE. NSE spokeswoman Divya Malik Lahiri denied these charges.
“We have not received any application at all for multi-exchange algorithms, so the question of approving or rejecting does not arise,” an NSE official said, pointing out that interest in multi-exchange algorithms has grown only in the past few months after SOR was approved, but there has been no written application.
However, brokers say that manual arbitrage between BSE and NSE prices has been going on for over a decade now, but they are not able to use algorithms because of NSE’s discomfort. The lack of progress on multi-exchange algorithms is part of a larger problem of mistrust between the two exchanges, they point out.
Even in the case of SOR, there were strong differences between the two exchanges on how it should be implemented.
While BSE was keen on introducing SOR as the exchange hoped that it will bring more liquidity in the cash segment and help revive its sagging fortunes, NSE was stressing on time stamps on trade orders and audit trails to solve any dispute.
BSE’s market share in the cash segment is roughly 20%, but NSE dominates the derivatives segment, which has seen a sharper rise in volumes. As a result, the overall market share of BSE has fallen to 2% from over 5% a year ago.
Despite attempts to resolve these issues, there was a stalemate, and it finally took the intervention of capital market regulator Securities and Exchange Board of India (Sebi) to sort them out. Even in the case of multi-exchange algorithms, it might require an intervention from the regulator to resolve issues and bring transparency in the approval process, the algorithmic trader cited earlier said.
A Sebi official who handles such issues declined to comment for this story.
NSE has recently been charged with abuse of dominant position in the currency derivatives segment by competition watchdog, Competition Commission of India.
Brokers say that there are chinks even in BSE’s armour.
Brokers have in the past written to Sebi asking for BSE feeds on a platform called NOW (Neat on Web), which is provided free by NSE’s subsidiary NSE.IT Ltd and used by 800-odd brokers across the country.
Two such letters, reviewed by Mint, say that BSE has not allowed its feeds on NOW because of which the brokers have been forced to have multiple front offices and risk-management systems. BSE had agreed to share data feeds on NOW in early 2009, but after a change in management, it went back on that. The terms of the agreement were favourable only for NSE and the decision to not share feeds on NOW was a commercial one, a senior BSE official said.
A BSE spokesperson said it has not discriminated against any entity, including NSE.IT and Omnesys. “Any member of BSE desirous of taking third-party order-routing systems have several technology vendors to chose from such as Marketplace Technologies Pvt. Ltd, NSE.IT, Omnesys, Financial Technologies (India) Ltd, 3i Infotech Ltd, Religare Technova Ltd, etc.,” the spokesperson said.