My brief analysis of the Algo--and High Frequency--Trading report submitted by NIFM (National Institute of Financial Management) to economic affairs department of the finance ministry:
Everyone appears to be concerned about the mis-use of algo trading and high frequency trading (HFT) in the domestic equity market. But the fact that algo trading and HFT is happening in a big way is exactly what is contributing to the extremely high trading turnover (particularly in F&O) and which takes India to the top 2-3 equity markets by size of trading volumes.
Some of the concerns surrounding algo trading such as front-running institutional orders (particularly of mutual funds) are legitimate. But these can only be addressed by active regulatory surveillance and not through restrictions (like time resting, etc) on the contours of algo trading.
Competition between NSE & BSE should not be allowed to stay unhealthy whereby the smaller-of-the-two-stock-exchanges lobbies with regulators and governemnt for killing or curbing of new technologies in trading under the pretext of investor protection but with real intention of strangling the growth of the larger stock exchange.
New technologies can not be wished away. And, it will inevitable drive volumes up. The solution is to keep upgrading surveillance technology to ensure it stays high-speed, real-time and intelligently-programmed. This can safeguard the interests of genuine medium-to-long term investors (institutional, retail) and also genuine traders do not get hurt by manipulative algorithms by other traders.
========================================================
The NISM report explains how front running can take place using algo trading:
"...Mutual funds are worst hit Mutual funds (mostly active funds) that do a lot of large block trading and tend to trade urgently or predictably are worst hit. Since mutual funds trade in large quantities, there are possibilities where other HFT algorithms sniff these large orders and capitalize on this information, thus front-running large orders and manipulating markets in the process..."
========================================================
Everyone appears to be concerned about the mis-use of algo trading and high frequency trading (HFT) in the domestic equity market. But the fact that algo trading and HFT is happening in a big way is exactly what is contributing to the extremely high trading turnover (particularly in F&O) and which takes India to the top 2-3 equity markets by size of trading volumes.
Some of the concerns surrounding algo trading such as front-running institutional orders (particularly of mutual funds) are legitimate. But these can only be addressed by active regulatory surveillance and not through restrictions (like time resting, etc) on the contours of algo trading.
Competition between NSE & BSE should not be allowed to stay unhealthy whereby the smaller-of-the-two-stock-exchanges lobbies with regulators and governemnt for killing or curbing of new technologies in trading under the pretext of investor protection but with real intention of strangling the growth of the larger stock exchange.
New technologies can not be wished away. And, it will inevitable drive volumes up. The solution is to keep upgrading surveillance technology to ensure it stays high-speed, real-time and intelligently-programmed. This can safeguard the interests of genuine medium-to-long term investors (institutional, retail) and also genuine traders do not get hurt by manipulative algorithms by other traders.
========================================================
The NISM report explains how front running can take place using algo trading:
"...Mutual funds are worst hit Mutual funds (mostly active funds) that do a lot of large block trading and tend to trade urgently or predictably are worst hit. Since mutual funds trade in large quantities, there are possibilities where other HFT algorithms sniff these large orders and capitalize on this information, thus front-running large orders and manipulating markets in the process..."
========================================================
No comments:
Post a Comment