With direct market access growing in popularity in India, Mumbai-based L&T Mutual Fund has built up its use of algorithms to the extent that they account for more than half of its equity trading.

“We use DMA for stocks that show good volume and liquidity,” says Praveen Ayathan, chief equity trader at the firm, with $3.01 billion in AUM, 25% of which is in equities.

“We benefit from paying lower commissions when executing via DMA, but we are also assuming execution risk, because our team has taken control of the entire execution from the trading desk to the exchange.”

Ayathan’s team of two equity traders use the volume-weighted average price (VWAP) benchmark for assessing brokers’ execution services.

To achieve best execution in equity trading, L&T Mutual Fund runs a quarterly vote internally among three portfolio managers, six analysts and its two equity traders.

The traders score the brokers based on how well they adhere to their instructions, and whether they show discretion when executing trades. They cast their votes using a software system, and these are combined with the views of the portfolio managers and analysts. The aggregate results generate a ranking of the top brokers out of a list of 70. At present they trade with 13 brokers.

L&T then gives the bulk of its trading and research requests to the top five on its self-generated list, with the remainder receiving a share in descending order. The fund firm only trades Indian equities and fixed income.

While both the National Stock Exchange and Bombay Stock Exchange run respective 30-minute block trading sessions in the morning for institutional investors to trade blocks of 500,000 shares or Rs50 million (whichever is lower), Ayathan says his team doesn’t use that window.

He notes that blocks traded outside this morning session can be executed based on a stock’s full-day VWAP price, which can be better understood as the day progresses to market close.

* An extended interview on L&T’s trading desk, also including fixed income, appears in the April issue of AsianInvestor magazine.