There's a correction in this article, which is mentioned at the end.
The country’s premier stock exchange is no stranger to rosy adjectives, but even the ardent admirers of the National Stock Exchange (NSE) would not have thought of the one coined by Ravi Apte, its chief technology officer. NSE, according to Apte, has “attained nirvana” in technology.
“Trading speed on NSE is close to the speed of light. And this is the limit,” he says. That’s a significant competitive advantage in the exchange business where the name of the game is the pursuit of trading milliseconds ahead of competition.
So, if the London Stock Exchange (LSE) claims to have the fastest trading engine, executing orders in 124 microseconds, NSE’s platform can trade at a latency close to the speed of light. Latency is the time taken for order matching and confirmation of trade after a client keys it in.
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Apte says since it’s impossible to increase the speed further, the exchange is now focusing on horizontal scalability by increasing the count of its trading engines. Horizontal scalability is just like widening the lanes after building an express highway to handle more traffic.
NSE clearly stands out in this race as many exchanges in the US and Europe are still hung up on latency to win and keep their clients.
Apte knows what he is talking about. Just last month, NSE became the world's largest derivative trading platform for the number of contracts traded on its platform. It was ahead of NYSE Euronext and Nasdaq OMX of the US and the Korea and Shanghai exchanges. Data from World Federation of Exchanges showed that more than 735 million contracts were traded on NSE from January to June.
Apart from the Nifty index, NSE’s most tracked derivative index with an ecosystem comprising exchange traded and index funds, the exchange offers trading in a wide basket of products. These include derivatives on the world’s most tracked indices, like the S&P 500, Dow Jones Industrial Average and FTSE 100.
NSE currently operates with 10 trading engines and handles 450 million orders every day with 50,000 order messages per second for trading across asset classes. It has a capacity to scale it to more than 200,000 messages and manage 10 times the current orders, retaining the round-trip latency in milliseconds, says Apte who has been with NSE for over six years now. Trading speed on BSE is less than 10 milliseconds and the exchange’s new trading system — BOLT — handles more than 20,000 orders per second and 100 million orders every day.
High frequency trading in US accounts for nearly 30 per cent of trades, but it started in India after NSE offered co-location facility in 2010. Between 15-20 per cent derivative volumes on the exchange are done through algorithmic trading. The exchange has sold rack space to more than 60 members while rivals have not managed to attract much attention. Exchanges host subscriber’s server close to their trading engines through co-location to achieve speed. Brokers using it get price feed every three-four milliseconds compared to the one in a remote place, who gets the same every 30-40 milliseconds.
But isn’t attaining nirvana dangerous when new competition is hotting up? After all, the MCX-SX has given it tough competition in the currency segment and will launch equity trading in a few weeks. Also, trading turnover on BSE has improved and crossed the Rs 100,000 crore-mark last month.
NSE, however, is confident of holding on to the trading volumes. Apart from the headstart given by its secure trading highway, Apte says NSE is among a few to follow real time risk management. This makes the trading highway among the most secure globally. “We have also installed several filters to check a flash crash like in the US,” Apte says.
High frequency trading has been under regulatory cloud as algorithmic trading can play havoc while exchanges push for speed. But NSE says its systems check 300 million portfolios continuously during the day for any possible error and ensures that margin requirement of members are met at all points of time by analysing trends in price changes. Once the trading member limit has been utilised to the extent of 70, 80 and 90 per cent of their margin deposit, the exchange flashes a warning message and shuts trading terminals at 100 per cent margin utilisation. Other risk containment measures include monitoring member performance and track record.
Of late, NSE has started providing tick-by-tick data feed to its members for every transaction. Using this, a broker can see the entire order book, for different market segments and for strategy.
Technology has helped in many other ways. Latest data show that investors from Tier-III cities contributed more than 45 per cent of the total cash market retail turnover in 2011- 12 on NSE, which has more than 2,00,000 trading terminals in over 2,000 towns and cities. Besides, these cities account for more than half the total retail investor base on NSE. No surprise that its trading terminal, NOW (Neat on Web), is among the largest private cloud in the country with more than 36,000 log-ins daily.
Correction: LSE's trading speed was wrongly identified in milliseconds, which is actually in microseconds.