Majority of F&O trading from co-location for second consecutive year

Co-location may well have a majority share of futures and options (F&O) trading in 2023-24 once again.

It accounted for 50.53 per cent of the National Stock Exchange (NSE) derivatives trading turnover in February, higher than the 50.1 per cent share seen in 2022-23 (FY23).  The share on the BSE was higher though February numbers showed a dip relative to the previous year. Co-location is the practice by institutional investors to locate their servers on the site of the stock exchange, in exchange for a fee, to cut down on latency and trade that much faster. 
 

The location can reduce fractions of a second from the time taken for the signal to travel to the stock exchange. The speed gives an edge to electronic trading systems which can execute thousands of orders or more in the blink of an eye. 
 

This was launched by the NSE in 2010. Co-location accounted for 8 per cent of the derivatives trading at the NSE in FY11, which jumped to over 17 per cent in FY12.

 

Non-algorithmic trading was the dominant mode of trading in FY11. More than a decade on, it just accounts for a tenth of the trading in the derivatives segment. 
 

The share of trading coming through mobile phones has steadily increased over the past decade and it accounts for about 13 per cent of the share of trading turnover in the NSE derivatives segment.
 

Co-location also dom-inates trading in the cash market segment with over 36 per cent share on the NSE and 36.6 per cent on the BSE. Non-algo trading accounts for a larger share in the cash market compared to the derivatives segment at 17 per cent on the NSE and 26 per cent on the BSE. 
 

The mobile segment is larger in the cash market. It constitutes a fifth of the mode of trading on the NSE, similarly on the BSE. Cash market trading refers to the buying and selling of the shares of firms, whereas the derivatives segment allows a buyer to bet on their price movements without necessarily owning the stock. Sebi has reportedly expr­essed concerns about risks from unvetted algorithms that can pose systemic risks.