Foreign investors embrace direct market access

FIIs use this route in a big way to save costs.

Direct market access (DMA) is fast gaining popularity among investors abroad, with more than a quarter of their trades in India coming through this route, say brokers familiar with the matter.

DMA is an electronic facility that allows brokers to offer clients direct access to the exchange trading system through their infrastructure, but without manual intervention. The Securities and Exchange Board of India had allowed DMA in April 2008.

“All big foreign institutional investors (FIIs) are using DMA in India,” said Vikas Khemani, head of institutional equities at Mumbai-based Edelweiss Securities. “It’s cheap, efficient and ensures confidentiality of trades.” The brokerage for DMA in the cash market is about 7-8p per Rs 100 turnover.

At present, the DMA facility is only available to institutional investors in India. Foreign broker-dealers such as UBS, Citigroup, Morgan Stanley, Deutsche, Credit Suisse, Goldman Sachs, Macquarie and Newedge provide DMA to institutional clients in India and the majority of the FII business is routed through them, including their own trading, according to Celent, a Boston-based financial research and consulting firm.

The major buy-side FIIs using DMA in India include Fidelity, Prudential and Aberdeen Asset Management.

“DMA allows quicker and cheaper access for FIIs, which already have the necessary infrastructure and expertise, unlike domestic institutions. It is also useful for algorithmic trading, again commonly used by FIIs,” said Anshuman Jaswal, senior analyst at Celent. “Our estimates for FII trades routed through DMA are 25-30 per cent, with the expected share being 40-45 per cent by end-2011,” he added.

DMA is popular in developed markets like the US, where around 70 per cent of the trades in the equity cash market are estimated to be coming through this route. In Europe, 30-35 per cent trades in the cash market are estimated to come through DMA.

The demand has been picking up in India, mostly on account of FIIs. By an industry estimate, there are around 70-80 brokerages and 110-120 foreign buy-side companies using this electronic facility to execute trades in India. Besides the foreign players, local proprietary trading firms are also using DMA, broking officials say.

Before allowing brokers to provide DMA to their institutional clients, stock exchanges in India test their software and ask for a demonstration of the facility.