The Algomania

Capital markets in the past, might have been the slave of slow order processing times, extending to days and months, thanks to autocratic privately ow

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Capital markets in the past, might have been the slave of slow order processing times, extending to days and months, thanks to autocratic privately owned stock exchanges. That was a time when a common man couldn’t imagine himself in the hustle and bustle of a trading floor because of lack of heuristic explorations.


The Trade

Times have changed and now we are talking of trading cycles of up to T+2 days while order punching and execution rates are being up to the tune of 200 milliseconds. An icing on the cake is the modern stock trading practice called algorithmic trading. It refers to the use of systems, which can execute thousands of orders on the stock exchange in less than a second. The fast computational and execution abilities of a computer algorithm code has made the necessity of long trading cycles extraneous. The orders here are executed according to previous;y decided conditions entered by the trader which he sets in the program. The algorithm captures the market feed data and dynamically punches the orders on the exchange on behalf of the trader, while the trader may lay on his back while millions of orders are executed in a fraction of a second.

It’s really a problem solver isn’t it?

But, these developments have caused an irk to the other non-algorithm traders which they say are becoming victims to the fast execution times because they are not able to process their clients’ orders as fast and promptly, thereby distorting the transparency and equality. Besides a Delhi-based Investor Association has presented a report to the Veerappa Moily headed Parliamentary advisory committee on alleged irregularities in the processes followed by Securities and Exchange Board of India in introducing algorithmic trading in Indian markets. Key issues included absence of straightforward procedures in introduction of algorithm-trading, inadequate safeguards to ensure level playing field for small investors and dangers of delegating regulatory oversight of such trades to exchanges.

Going by the volume of algorithm trades in India, algorithm orders account for about a fifth of total volumes on the exchanges. Thus, shaving off such orders from the exchanges might reduce the bulk of orders and might also reduce the investments of FII’s in India. Instead proactive measures must be taken for the resolution of issues like:

1. Introduction of minimum resting times (500-600 milliseconds) can mitigate the potential for misuse inherent in ‘fleeting orders’ which are created and cancelled in short periods thereby creating the impression of artificial liquidity and affecting the behavior of the rest of the market.

2. Currently co-location services are permitted by stock exchanges. Co-location services should also be given to MCX, NCDEX and NMCE (the 3 commodity exchanges of India).

3. Software trading services for retail investors or institutional non-algorithm investors can be more integrated and matching the high frequency algorithms by getting co-location servers with exchanges.

4. Incorporation of algorithmic trading for retail investors.

With such artifacts some glitches can be mended. It’s the time Indian Capital Markets realize the importance of transparency along with accuracy and speed to be able to give a smooth trading experience to its investors.