Hirander Misra, chairman of UK-based Forum Trading Solutions Ltd and a consultant on automated trading, recently pulled out of negotiations for the top job at the Delhi bourse. This was over regulatory restrictions on economic interest. A pioneer of the electronic trading business, he was the co-founder of Chi-X Europe, a small trading platform that challenged the London Stock Exchange to become the second largest equities trading venue in Europe in 2010. In an interview with Palak Shah, Misra says why he is still keen on the Indian market. Edited excerpts:
What are your other plans after DSE? Where do exchanges in India stand on trading technology?
DSE was finalised but the new regulations don't make economic sense, as key exchange personnel globally are allowed economic interest but not in India. But rules like not allowing the exchange to list on own platform and dual reporting department heads are good. I will play a role in India; there are other offers, but more on that later.
The crucial aspect of technology is to be responsive to market needs, which is not the case with India's two big exchanges. Once competition took hold in the West, it brought innovation even from incumbents, lower fees, tighter spreads and demand for more competition. The concern in India is that the National Stock Exchange (NSE) is too dominant. NSE innovations like order-driven trading and central counterparty clearing, which once drove down costs, are no longer subject to serious competition. Hence, its fees appear too high, given the state of technology.
If you believe NSE’s critics, the so-called 'child of competition' has become the incumbent. While everybody is talking about higher volumes on NSE, data shows its turnover is far smaller than other global exchanges. Derivative volumes on the Bombay Stock Exchange (BSE) might be picking up, but it is on the back of incentives. We need to see if they sustain, as cash volumes have declined, and, if the securities transaction tax (STT) is a catalyst for this.
Technology is an enabler. BSE has moved to offer co-location services but they have not addressed the core issue of its BOLT system. It is outdated, which is why BSE has had limited success in attracting foreigners to drive liquidity. In Europe, Chi-X was the first to gain tangible market share and challenge the monopolies, due to superior technology.
NSE’s dominance in India is equivalent to the London Stock Exchange being superseded by a new entrant. Currently, if anything, improved technology and product development have seen LSE gain back some market share. Even in the US, when NYSE’s market share was eroded, there ended up being an oligopolistic framework, where there were a number of players with decent market share (Nasdaq, Bats and Direct Edge), rather than a single dominant force. Going ahead, Indian exchanges should offer technology and products to clients and not transaction service only.
NSE claims to trade at lightning speed and BSE's is less than 10 milliseconds. Why do you say they are lagging?
I want to counter NSE’s claims, as traders have said in recent conferences that response time in India is slow. Compare 10 milliseconds or NSE with LSE or the Nasdaq platform running on Singapore Stock Exchange and technology in India is far removed. This, in itself, is a risk for market makers. DSE's deal with Millennium IT will put it in line technologically with leading western exchanges. It is the same system running LSE’s equity markets, at average round trip latency of 100 microseconds and high throughput.
Technology was the reason why Chi-X took liquidity away from LSE. There was innovation and cost effectiveness as well by Chi-X. A large part of trading in India is still manual and terminal-based. NSE’s saying its technology is horizontally scalable -- frankly, every technology is now horizontally scalable. What NSE can run on hundreds of servers, in Europe we do it on a handful, in an eco-friendly and cost-effective manner. Modern technology is compact, scalable and has better risk management. Automated trading is picking up in India but the problem is slower systems to disseminate strike updates. Slow reaction to information shows liquidity providers sitting on high risk and so they move away.
I believe, it would be Ashish Chauhan's top agenda to further upgrade systems once his appointment as chief is cleared. Notwithstanding that, MCX-SX can innovate on products; their focus previously has been on non-STT segments. Financial Technologies, running the MCX exchanges, has hardware-intensive technology. The markets in which they operated till now had only domestic players, using dated technology. The group will be tested as they enter the market with STT, more technology with competitors and foreign players. The volumes on the group's foreign exchanges are not too much to talk about.
There has been not much product innovation in India? Risk management systems of Indian exchanges are not enough?
On the product side, the direct market access and smart order routing (SOR), too, have some issues that are limiting take-up from a market structure standpoint. For instance, there is no defined best execution requirement from regulators, as in the US and in Europe. Also, there is no opportunity to cross net trades between two exchanges, and the stocks traded at a particular exchange need to be settled and cleared at the same exchange, adding to the frictional costs of trading. Off-setting of trades brings down risk and is cost-effective.
Nonetheless, such teething trouble was also witnessed in Europe with SOR in the first few years after MiFID went live in November 2007, and will be overcome as experience of SOR increases and other market structure changes are driven through by Sebi. Also, exchanges should differentiate themselves and not copy products, as LSE did with Turquoise and failed. India has risk management but exchanges will have to be reactive and their systems should be such that they alert them prior to the problem or predict it. Per-trade risk parameters will have to be robust. Global exchanges are moving towards this and the US is researching on predicting problems. The circuit filters in India are good but will have to be well-defined for a wider range. Also, it is no coincidence that foreign trading in India is concentrated in segments where STT is less. So, policy is disappointing and a roadblock for development.
Trading speed and use of algo are under a cloud globally. What makes you so confident? You think co-location provides a level playing field?
It is wrong to say all problems were due to speed. Contrary to perception that speed increases risk, it also reduces it. Modern systems are designed for better risk management. Coupled with cost-effectiveness, it equivocally reduces risk by providing market feedback at ultra-low latency to enable real-time risk management. The Sebi rules on algorithmic trading are robust. They are pragmatic without being prohibitive and are better than in developed markets, where things are still in the air.
On the co-location issue in a Delhi court, I think retail investors should be protected but innovation cannot be stopped. You can't now imagine a world without cell phones. Similarly, co-location service is crucial for exchanges and they are offering it to everyone who pays. But the system is not relevant to all; only latency-sensitive traders or liquidity providers who have a risk appetite. If you want it for the sake of executing orders, it doesn’t really matter.
