Brokers are hopeful a move by India’s securities regulator to streamline rules on algo connectivity will drive electronic execution through direct market access.
However, there remains much uncertainty this will be the case. In the meantime, a group representing smaller brokers and retail investors is opposing moves that could increase algo trading on the grounds it creates an unlevel playing field.
Earlier this month, the Securities and Exchange Board of India (Sebi) announced it would rescind a requirement on investment managers to sign a client authorisation agreement with each individual investor they manage a portfolio for.
Ian Smith, managing director of electronic execution for Asia-Pacific at US bank Citi, says the clarification should bring welcome changes to the industry.
He notes the documentation process around investment managers using a broker for direct market access (DMA) or direct strategy access (DSA) have been made simpler, clearing the way for managers to acquire DMA from brokers.
“Prior to this update, DMA or DSA were rarely used directly by international investment managers as the documentation process and the need for getting approvals from various signatories was onerous,” he reflects.
DSA is algo-trading around a broader set of investment benchmarks, for example, volume-weighted average price (VWAP), arrival price and implementation shortfall. Based on investment goals the algo decides how to place an order.
In theory the latest clarification means more managers will be able to use such a form of algo directly rather than through brokers.
However, whether the streamlined process will encourage more managers to acquire DMA from brokers is uncertain.
A dealer on the trading desk of a leading insurer in Mumbai says they have no plans to do this because “if you are using DMA, there is no point continuing to engage with our brokers who are supposed to provide value on execution”.
One trading head at an investment firm in Hong Kong notes that India’s market structure has meant many institutional investors have preferred trading blocks off-exchange via a broker’s high-touch cash trading desks rather than using algos.
“Anyone knows that India is a dangerous market to try to automate with DMA,” he says. “While the spread is small, the depth of the market is not good at all. You could have less than 20 shares being demanded and offered on the bid/ask at any one point and you don’t want to be working your order over the day using algo.”
Co-location — a form of DMA that sees exchanges renting space to trading firms to place their computers in close proximity to their servers to reduce latency — has made high-frequency strategies possible in many markets.
But the Intermediaries and Investor Welfare Association of India, a group comprising small local brokers and retail investors, has filed a petition at the New Delhi high court arguing that bigger brokers able to co-locate servers have an unfair advantage, squeezing out those with no access to such technology.
The high court has issued notices to Sebi, the National Stock Exchange and Bombay Stock Exchanges to respond to such pleas.
“There has been a lot of misunderstanding of algo trading among the local Indian community,” notes another head of electronic execution at a brokerage in Hong Kong.
India has joined other Asian markets such as Australia and Hong Kong in coming up with its own supervisory regime governing electronic trading.
Sebi puts a greater onus on investment managers gaining approval from domestic exchanges when they want to use a new algo or make changes to existing algos.
But the Australian Securities & Investments Commission puts the onus on brokers to report these changes.