India moves closer to best execution
India is some way behind Asian markets such as Hong Kong and Japan on algorithmic trading, but the size and liquidity of the market there is “starting to get interesting”, says Jim Shapiro, head of market development at the Bombay Stock Exchange (BSE).
Speaking at the Trading Architecture conference in Hong Kong last week, Shapiro said the main regulator for this area – the Securities and Exchange Board of India (Sebi) – has been quite progressive in its approach. Despite the 'flash crash' in the US on May 6 – which many held up as evidence of the problems that algo trading can cause – and a fast-moving regulatory environment globally, Sebi did not flinch in coming out with new rules governing smart order routing (SOR), he adds.
On August 27, the regulator released a circular asking all exchanges to put in place SOR systems for all classes of investors. (SOR systems allow programme traders and other investors to automatically pick the exchange best-placed for orders at the time of execution.)
This move settled an issue whereby the National Stock Exchange – India’s biggest exchange – would not approved any algorithms on the NSE if they also connected to the BSE, citing various technical concerns.
Shapiro says he now expects to see India's first multi-exchange algorithm launched within 30 to 60 days.
However, there are a couple of issues about the new circular, he says. For one thing, it would be useful if Sebi would more clearly define SOR, including specifying whether SOR is a subset of algorithmic trading or vice versa.
Another issue, adds Shapiro, is the requirement for stock brokers to enter into a specific agreement with clients on SOR. “It could be quite onerous to go back and renegotiate contracts [to take account of this],” he says. “We would just want to ensure that SOR is covered by original client agreements.”
The BSE is working on bringing its systems and processes up to speed for high-frequency/algorithmic traders and other users of SOR, says Shapiro. Within the next few days, the exchange will issue guidelines and give practical assistance to those wishing to deploy SOR on its platform, as well as investing in capacity to accommodate algo strategies that involve high order-to-trade activity.
This is part of the BSE’s overall move to attract more members, both domestically and internationally. Shapiro says the exchange aims to bring in 2,000 or 3,000 new members in the next couple of years. This past spring it reduced its membership fees by 90% and, since then, 450 members have applied for membership.
The exchange is focused on attracting more international participants as well, he adds. “That wave is coming in India,” says Shapiro, “and we want to make sure a substantial part of it comes to the BSE and not just to the NSE.”
The BSE also aims to list more derivatives contracts and exchange-traded funds, he adds. Gold ETFs dominate the market at present, accounting for 1,815.1 crore rupees ($390 million), well over half of India's total ETF AUM of 3,185 crore rupees as of May this year.