Investors taking to quicker trade routes

Distinct rise in use of algorithmic trading and direct market access over past year; cost, expertise the main barriers for domestic players

A higher proportion of stock market volumes are coming in through avenues such as algorithmic (algo) trading and the Direct Market Access (DMA) route, used to trade with higher speeds on the exchanges.

An analysis of exchange data shows the proportion of algo trading on the exchanges has been rising over the past year. The proportion of such trade on the BSE had gone up from 19.06 per cent in July 2013 to 28.77 per cent in July 2014, according to data on the exchange’s website.

Another route for executing orders quicker, DMA, allows investors to directly place their order to the exchange without having to first inform the broker, who then keys it in. This has risen to nearly a third of total institutional volumes, according to an ICRA report.  

FASTER TRADING ROUTES GAINING CURRENCY

• Algo trades rise from 19.06% to 28.77% on BSE
• Direct market access accounts for one-third of institutional volumes, says Icra
• Almost Rs 66,000 crore in daily average volumes in July came in through algos, according to exchanges’ data
• Foreign investors dominate trade, say experts
• Domestic institutions face hurdles of cost and expertise

Karthik Srinivasan, co-head of financial sector ratings at ICRA, said the past year had seen a marginal rise in the use of DMA, even as the institutional broking segment continued to go through tough times.

The head of one of the top five domestic brokerages suggested DMA has had an impact on hiring among dealers in spite of the 20 per cent run-up in key market indices this year. “There have been no additions,” he said.

National Stock Exchange data shows algo accounted for 14.78 per cent of trades in July. The exchange does not provide historical data. NSE had daily average volumes of Rs 2.39 lakh crore during the month. This translates into Rs 35,324 crore in traded value every day through algorithms. The BSE exchange had daily average volumes of Rs 1.06 lakh crore. At 28.77 per cent, algo generated Rs 30,496 crore in the month.

In sum, algo trading accounted for Rs 65,820 crore during the month. The DMA route might translate into another Rs 1,000 crore, according to exchange data. The ICRA data is based on anecdotal information, while exchange data also accounts for non-institutional trades, leading to a difference in estimates.

Market sources suggest foreign institutional investors are more likely to make use of DMA than domestic institutions. A large proportion of volumes from these two avenues are in the derivatives space, said one broker. Domestic institutions are, however, looking at the opportunities. Swapnil Pawar, business head and director at Karvy Capital, said his company was working on entering the algo space.

“We are doing some early-stage R&D (research and development) in the space…there are quite a few domestic payers who have established themselves in algo trading. For others, cost and expertise can be daunting barriers when they consider the possible gains One will have to see how things pan out in the days ahead,” he said.