Sanjay Rawal, CEO of Open Futures, talks about the latest trends in high frequency trading in India.
What are the principal elements of the HFT market in India? How well developed is it? How quickly is it growing?
Automated trading has seen a massive jump in the last three years. However, all of this is obviously not high frequency. We have seen a few early adapters trying to use higher frequency strategies, but most have tempered these by starting strategies which involve more computation. The problem is that there is just not enough liquidity on the market to ensure that you could close out most of your positions by the end of the day. Therefore, it seems more profitable to be in lower frequency, but slightly more complex, type of trades.
What major challenges do you face? Are they technological or regulatory?
Both varieties. Clearly, just like everywhere else, the Indian regulators are becoming more conscious of the risk that runaway algorithms carry, and therefore they are beginning the process of trying to impose limitations. As is often the case with such situations, we are likely to see regulatory overreach and that will certainly impact the spread of high frequency trading.
The regulator has introduced new rules to curb the perceived risks of high frequency trading, have these had an impact?
To some degree. However, I believe that the best form of defence that the regulator has is by imposing pre-trade risk checks at the exchange level. As long as the risk management software run by the exchange is stable and has a low level of impact, (by increase in market volume) it would be the surest form of ensuring that algorithms don’t go haywire.
Specifically on the rules regarding order to trade ratios, what are your thoughts on these charges?
Terrible mistake. How on earth does it benefit the exchange or the participants if liquidity is pulled out from the market? In some form or other, every bid in the system represents some form of liquidity. It would be far better to impose some limits on how far away you can bid or how long the bid has to stay in the market, or the exchange could incentivise bids which are in products which have low liquidity.
What technology would you like to see on the Indian market?
No specific technology as such. Just as other markets have evolved, so will the Indian markets to accommodate newer technologies. Anything that you have seen happening in any of the larger markets should end up coming to India. Of course, my opinion is that in the present context, it will be difficult to justify the type of technology spend that might be needed. Hopefully, exchange-level pre trade checks, as well as newer technologies and more complex strategies will come next.