Algo trading grows apace in non-equity segments too

Algorithmic or programmed trading is growing in India. After the equity segment, the strategy is also gaining ground in currency and commodity trading.

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.

From nil till fairly recently, the market share of algo trading has risen to five to 10 per cent in the currency segment and five to seven per cent in the commodity segment of overall average daily trading, say market players.

In the currency segment, the three domestic exchanges — National Stock Exchange (NSE), United Stock Exchange (USX) and the MCX Stock Exchange — together generate average volumes of Rs 25,000 crore daily. In the commodity futures market, the Multi Commodity Exchange and National Commodity and Derivatives Exchange together generate average daily volumes of nearly Rs 80,000 crore. While the rupee-dollar futures contract dominates trading in the currency segment, it is base and precious metals and crude oil which generate a large chunk of volumes in the commodity market.

"Since the beginning of this year, algorithmic trading is swiftly gaining ground in currency and commodity segment in India," said Giles Nelson, chief technical officer of UK-based Progress Software and co-founder of Apama. The company pioneered commercial application of algo trading software.

In the equity segment, where the NSE and the Bombay Stock Exchange (BSE) together generate volumes of over Rs 1 lakh crore daily, the share of algo trading is 25-30 per cent. "Algo trading in both currency and commodity segment will grow at a breakneck speed as arbitrage grows. Five years down the lane, the market share of algo trading in the cash equity and currency market alone would be 50 per cent. In the commodity segment, it would be around 25 per cent. In the equity segment, after smart order routing was allowed recently, algo trading has become more attractive," said Nelson.

Some leading algo software providers are trying to leverage on India. Only last month, Germny's RTS group initiated negotiations to acquire Pune-based First Futures Software Engineering, a high-end technology solutions provider. RTS has already applied to the domestic exchange to act as a vendor for programme trading. The BSE-promoted Market Place Technologies and NSE-promoted Omnesys Technologies are other leading software vendors.

"Many members have shown interest towards algo trading in the past few months. Also, there is demand for co-location facility. Already, you can say that algo trading in currency could be between five and 10 per cent of overall volumes," said Saurav Arora, director, USX.

Although, official data suggests that algo trading accounts for nearly 30 per cent of volumes on US-based NYSE Euronext, the strategy has been under the regulatory scanner after the flash crash on May 6. While algo trading has been blamed for it, experts are yet to figure out and fix the problems in complex computer programmes.