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Algo Trading Scaling Up in India

LiveMint: Algo trading “encouraging” in India, says Goldman

The resurgence of interest in the Indian markets in the past six months has spawned a new phenomenon—the growth of direct market access and algorithmic trading facilities offered by brokers. Goldman Sachs, a leader among sell-side electronic trading service providers globally, has had reasonable success since launching this facility in India early this year.

Goldman Sachs has been offering direct market access to its clients since 2008, a few months after the Securities and Exchange Board of India allowed these facilities for institutional investors. In early 2009, it offered its electronic trading clients three algorithmic trading strategies and last month it expanded this to nine algorithms. Siddharth Chhabria, head of India sales for Goldman Sachs Electronic Trading, says, “A large number of orders placed with Goldman for the Indian markets are using the direct market access route. Of this, as much as 90% are orders that use algorithms. The most popular algorithms are based on liquidity-seeking strategies due to the lack of depth in liquidity in many securities in India.”

For instance, one strategy popular with Goldman’s clients is “participate”, which works a large order on an exchange by placing small limit orders or “child orders”, depending on the existing liquidity in the stock. The algorithm watches market action on a tick-by-tick basis to keep in line with the exact liquidity situation in the stock and at any given time there are a number of child orders at different price points to participate in the existing liquidity.

There is enormous action in this space, and I can actually see bots placing orders in various options (and yanking them off nearly instantly) every so often. So much that the NSE decided enough is enough and will charge a penalty for “too many unexecuted orders” – a charge of 1 paise to 4 paise per order if the order to execution ratio is greater than 100 to 1.

Execution algorithms take precedence – for mutual funds or for the buy side, getting “VWAP”, or “Volume Weighted Average Price” may be useful for large orders (and to know they aren’t being stiffed by the broker). An algorithm can easily split orders into small parts and use tick-based liquidity information to get as close to the VWAP – reported by the exchange – as possible.

With the great squid perking up electronic trading in India, liquidity flows will be enormous. As a retail trader can you get electronic trading access? There is just one electronic trading platform I know of – and it’s a bit expensive – Interactive Brokers. Yes, they are in India now.

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