HFTs shift to Gift City to save on stamp duty and transaction costs

Although most high-frequency traders (HFTs) prefer to set up shop close to stock exchanges to enjoy better latency, a few are willing to sacrifice proximity to save a few bucks.

 

Two HFTs have already established their offices at the Gift City (Gujarat International Finance Tec-City) IFSC while many more are likely to follow suit. IFSC stands for International Financial Services Centre.

 

These HFTs, which deploy algorithmic and quant strategies, will continue to be regulated by the Securities and Exchange Board of India (Sebi) and trade on domestic exchanges. The shift to Gift City, according to industry experts, is to save a significant amount on stamp duty paid on broking transactions.

 

 

As the number of trades executed by HFTs is higher, the transaction cost also surges. With the stamp duty refund, the benefit can run into crores, explained an expert.

 

Legal and tax experts said that a scheme of the Gujarat government has prompted this shift. Under the scheme, 100 per cent stamp duty paid on share broking transactions is refunded to eligible brokers.

 

Though tax benefits and the stamp duty benefit were notified nearly five years ago by the Gujarat government, it is only now that it has caught the eye of HFTs.

 

“Earlier there were certain gaps in the process, which led to lack of clarity on whether the refund will come. Now, for the last one-and-a-half years, it has been streamlined. It takes time for global institutions to formalise a new setup. A few have initiated the talks now,” said a tax expert.

 

"Gift city provides an opportunity to stock brokers to save on stamp duty under the Gujarat state Government policy unless the end client is a foreign investor. This avenue is now becoming popular considering that the refund mechanism to reclaim stamp duty has become streamlined and particularly appealing to HFT players where stamp duty becomes a key cost component," said Rajesh Gandhi, Partner at Deloitte Haskins & Sells LLP.  

 

Jump Trading and Tower Research are two such firms that have set up their offices in the Gift City. While Jump already has an office in Mumbai, Tower’s first office in India was set up in Gurugram, Haryana. Both these HFTs have set up their Gift City offices in the last one year, said experts. Emailed queries to these two HFTs remained unanswered till press time.

 

Sources said that multiple HFTs have shown interest and are considering setting up shops based on their analysis of opportunities and benefits in the financial hub.

 

“The Government of Gujarat, through multiple notifications and circulars, has introduced a stamp duty refund incentive to encourage share brokers to set up and operate their registered offices in Gift City. This initiative is part of a broader strategy to develop Gift City as a premier international financial services hub by reducing transaction costs and making it attractive for stockbroking activities,” said Suresh Swamy, partner at Price Waterhouse & Co.

 

To avail themselves of the benefits, the HFTs need to register their share-broking offices within Gift City and carry out actual trading operations. Further, they must employ a minimum number of staff, and full-time employees, including those in compliance and operation roles, and maintain connectivity and infrastructure requirements such as disaster recovery setup and trading terminals.

 

"All traders and dealers must be physically present within GIFT City. For entities using co-location, the session IDs must be mapped to GIFT City, and all associated trading infrastructure—including terminals, API IDs, and related systems—must also be located within GIFT City," said Gandhi. 

 

In another development, the capital market regulator Sebi in May allowed stock brokers to operate in the International Financial Services Centre (IFSC) at GIFT City, without taking its prior approval. 

Gifting gains

 

• 2 HFTs have already set up offices in Gift City, many more have shown interest
• Streamlining of Gujarat government’s policy on refund of 100% stamp duty on transactions has led to the rise in interest
• Such entities mostly prefer setting up closer to exchanges for better latency
• These algorithmic traders continue to be regulated by Sebi and trade on domestic exchanges