Capital markets in India are very mature and supportive of institutional investing
and trading.
India represents a clear frontier opportunity for algorithmic (quantitative and / or systematic)
traders due to the confluence of several factors.
1. Algorithmic Trading in India
Willard John Thomas Associates
Disclaimer:
All information contained herein is believed to be accurate as of the time of publication. No
suggestion, representation or warranty is made or implied as to the suitability of this information
for any purpose whatsoever.
September 2010
08.09.2010.1
2. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
EXECUTIVE SUMMARY ................................................................................................................. 3
LEGAL AND REGULATORY ENVIRONMENT.............................................................................. 4
FOREIGN INSTITUTIONAL INVESTORS .............................................................................................. 4
OFFSHORE REGISTRATION OF HEDGE FUNDS ................................................................................. 5
SHORT SELLING ............................................................................................................................ 5
CIRCUIT BREAKERS ....................................................................................................................... 6
EXCHANGES .................................................................................................................................. 7
NATIONAL STOCK EXCHANGE ......................................................................................................... 7
BSE ............................................................................................................................................. 7
MCX............................................................................................................................................. 8
UNITED STOCK EXCHANGE OF INDIA LIMITED .................................................................................. 9
REGIONAL EXCHANGES.................................................................................................................. 9
CLEARING AND SETTLEMENT .................................................................................................. 10
NATIONAL SECURITIES CLEARING CORPORATION LTD ................................................................... 10
CLEARING CORPORATION OF INDIA LTD. ....................................................................................... 11
TECHNOLOGY / INFRASTRUCTURE ......................................................................................... 12
INTERNET / LEASED LINE CONNECTIVITY ....................................................................................... 12
CO-LOCATION .............................................................................................................................. 12
FIX CONNECTIVITY ...................................................................................................................... 13
SMART ORDER ROUTING .......................................................................................................... 13
MARKET DATA ............................................................................................................................ 14
TRANSACTION COSTS ............................................................................................................... 14
EXCHANGE FEES ......................................................................................................................... 14
REGULATORY CHARGES .............................................................................................................. 14
BSE ........................................................................................................................................... 16
INSTITUTIONAL BROKERS / PRIME BROKERS....................................................................... 17
CUSTODIANS ............................................................................................................................... 17
HUMAN CAPITAL AND SUPPORTING SERVICES.................................................................... 18
IN-HOUSE .................................................................................................................................... 18
SUPPORTING SERVICES ............................................................................................................... 18
EXISTING FIRMS AS SOURCE OF TALENT ....................................................................................... 18
ACADEMIA ................................................................................................................................... 18
RETURNING EX-PATS .................................................................................................................. 18
CAVEATS ...................................................................................................................................... 19
08.09.2010.1 2
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
3. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Executive Summary
Capital markets in India are very mature and supportive of institutional investing
and trading. To date algorithmic trading has not played a major role. We feel this
is changing rapidly.
India represents a clear frontier opportunity for algorithmic (quantitative and / or systematic)
traders due to the confluence of several factors.
1) A supportive legal and regulatory framework
2) Well established and liquid stock exchanges
3) Sophisticated technology and connectivity to the exchanges
4) Presence of all major banks and brokerages
5) Abundance of people with relevant knowledge and experience
6) A dearth of players in the space (limited competition).
Given the existence of major banks such as JP Morgan, Morgan Stanley, HSBC, Credit Suisse
and Goldman Sachs, etc., it is probable that the current window of opportunity will close sooner
rather than later as sophisticated players recognize this opportunity and make the requisite
investments.
Timing is difficult to estimate but given the amount of time necessary to develop, test and
implement the sophisticated computer models, connect to the exchanges and establish the legal
corporate structure to trade, a range would seem to be 1 to 3 years for early adopters and 5 years
before all major players with an interest are active in the market.
The major exchanges are the National Stock Exchange and Bombay Stock Exchange. There are
a host of regional exchanges as well as a couple new ones trying to enter the business.
FIX connectivity is available at the major exchanges but it is non-native so utilizing the
exchange’s native protocol is a more likely solution for latency sensitive systems. Co-location is
or will be available at both the major exchanges (currently at NSE but announced by BSE.)
Short selling is not permitted for foreign investors. Nor is it practical with no “Easy to Borrow”
system in place. Many quantitative traders use futures to hedge.
India hedge funds typically establish their domiciles in Mauritius for the favorable tax treatment.
08.09.2010.1 3
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
4. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Legal and regulatory environment
Foreign Institutional Investors
Foreign Institutional Investors (FII) may register with the Securities and Exchange Board of India
(SEBI) and the Reserve Bank of India and are allowed to operate in Indian stock exchanges
subject to the guidelines issued for the purpose by SEBI.
A registered FII is required to buy or sell only for delivery. It is not allowed to offset a deal. It is
also not allowed to sell short.
Foreign brokers upon registration with the SEBI are now allowed to route the business of
registered FIIs. Guidelines for the purpose have been issued by SEBI.
Foreign participation in Asset Management Companies and Merchant Banking Companies is
permitted.
Currently, hedge funds may come in through the “front door” and invest directly by registering
themselves with SEBI as foreign institutional investors (FIIs). Alternatively, they can invest in an
indirect fashion through offshore derivative instruments (ODIs) (such as participatory notes)
issued by other registered FIIs. Although the ODI route was restricted by SEBI in 2007, that
decision was reversed in 2008, thereby permitting ODI investments by entities such as hedge
funds, subject of course to relevant KYC (know-your-client) and disclosure norms.
Arguably, the persistence of the ODI route in the Indian markets provides a more liberal
framework compared to the strengthening regimes in markets such as the European Union.
An alternative to full FII or ODI is coming in as a sub-account to an existing FII.
Top companies from the United Kingdom and the United States among others are already active
in India's financial markets. Some of the big names are: Goldman Sachs Merrill Lynch,
Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong
and Shanghai Banking Corporation among others.
During the second quarter of 2009, Goldman Sachs’ electronic trading volume of India equities
tripled, while the electronic trading volume for futures grew more than fourfold.
http://www.livemint.com/2009/09/29215738/Algorithmic-trading-uptake-in.html
http://www.nseindia.com/content/us/ismr2009ch8.pdf
http://www.indiastudychannel.com/projects/4849-Impact-Foreign-Institutional-Investors-Indian-
Stock-Market.aspx
http://www.indiaonestop.com/fdi-financial-services.htm
08.09.2010.1 4
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
5. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
http://indiacorplaw.blogspot.com/2010/05/impact-of-tightening-financial.html
http://www.livemint.com/2009/07/13221147/Indian-markets-slowly-warming.html
http://www.business-standard.com/india/storypage.php?autono=400268
Offshore Registration of Hedge Funds
Most international venture capital groups (hedge funds) register their corporation in Mauritius or
Singapore for the favorable tax treatment they receive.
The fact that Mauritius entities are exempt from capital gains tax in India has already made them
a popular vehicle for FDI in the subcontinent.
The advantages of setting up a hedge fund in Mauritius include:
• The existence of double taxation treaties with India (and China);
• Taxation benefits - funds are taxed at a rate of 15%, but benefit from a tax credit which is
equivalent to the higher of any tax deducted at source or 80% of the tax liability. There is
no capital gains tax and no withholding tax on dividends;
• A favorable time zone;
• Its ranking as the 17th best economy of 183 economies in terms of business facilities,
according to the "Doing Business Report 2010";
• A strong legal framework and regulations;
• Its qualified and experienced labour force;
• Excellent IT infrastructure and internet connections;
• Political stability and effective monetary policies; and
• The presence of international banks, accounting firms and law firms.
http://www.hedgefundsindia.com/blog/_archives/2010/3/10/4476760.html
ICFA online http://goo.gl/AG2O
Short Selling
The National Stock Exchange will launch a new system for securities lending, the basic building
block for short-selling, which is being encouraged by the regulator, the Securities and Exchange
Board of India (Sebi)
Until now, investors have mostly turned to India’s futures and options market to speculate on
stocks.
http://www.ft.com/cms/s/0/fd857764-69a6-11df-8432-00144feab49a.html
08.09.2010.1 5
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
6. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
While stock lending is legal up to 1 year for Indian Nationals, from a practical standpoint an “Easy
To Borrow (ETB)” system does not yet exist, limiting traders’ ability to implement long/short
strategies such as pair trading.
Furthermore, FIIs are prohibited from short selling.
“Through recent amendments to the FII Regulations (Regulation 15A and 20 A), the Regulatory
regime has been further strengthened and periodic disclosures regime has been introduced. The
provision 15 (3)(a) of the FII Regulations relates to the prohibition on short selling of securities by
FIIs. It allows that FIIs may transact business only on the basis of taking and giving deliveries of
securities bought and sold, and cannot engage in short-selling securities. Further regulation
6(1)(b) of FII Regulations, provides that the hedge fund have to be registered with the statutory
regulatory authority in their place of incorporation. Most Hedge funds would fail to meet this
criterion because they are not registered with any regulatory authority, nor are the managers
registered with regulatory authorities. In October ’07 SEBI has mandated that in the spot market,
FII will not be allowed to issue P-notes that were more than 40 per cent of their assets under
custody and those FII over the threshold will have to freeze their holdings. FIIs that have issued
P-notes below the limit may increase issuances at an incremental rate of 5 per cent of their
assets under custody.”
http://www.hedgefund-
index.com/Legal%20Framework%20for%20Hedge%20Fund%20Regulation.pdf
Circuit Breakers
In the U.S., the Securities and Exchange Commission (SEC) has proposed stock-by-stock circuit
breaker rules under which the authorities would pause trading in certain individual stocks if the
price moves 10 percent or more in a five-minute period.
This is in response to the disruption caused to the markets on May 6 whereby “the market
dropped significantly and after approximately 30 S&P 500 Index stocks fell at least 10 percent in
a five-minute period.” As Sandeep Parekh points out, circuit breakers in individual stocks have
been operational in India for over a decade.
08.09.2010.1 6
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
7. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Exchanges
Though many other (20+ regional) exchanges exist, BSE and the National Stock Exchange of
India account for most of the trading in shares in India.
National Stock Exchange
NSE is the largest stock exchange in India in terms of daily turnover and number of trades, for
both equities and derivative trading.
NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities.
It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.
NSE provides a trading platform for of all types of securities for investors:
• Equity
Corporate Debt
• Central and State Government Securities
• T-Bills
• Commercial Paper (CPs)
• Certificate of Deposits (CDs)
• Warrants
• Mutual Funds (MFs) units
• Exchange Traded Funds (ETFs)
• Index Futures
• Index Options
• Stock Futures
• Stock Options
• Currency Futures
• You can (or, soon will) trade 'currency options' in NSE
http://en.wikipedia.org/wiki/National_Stock_Exchange_of_India
http://www.nseindia.com/
http://www.nseindia.com/content/us/fact2009_sec1.pdf
BSE
Bombay Stock Exchange, or BSE) is the oldest stock exchange in Asia and has the third largest
number of listed companies in the world.
Bombay Stock Exchange Limited (BSE) has reduced membership deposit and fee requirements
(by 90%) for new members in the BSE’s Cash and Equity Derivatives segments with immediate
effect.
With over 4900 Indian companies listed & over 7700 scrips on the stock exchange, BSE has a
significant trading volume.
08.09.2010.1 7
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
8. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used market index in
India and Asia. In 2000 the BSE used this index to open its derivatives market, trading Sensex
futures contracts. The development of Sensex options along with equity derivatives followed in
2001 and 2002, expanding the BSE's trading platform.
• Purchased of Marketplace Technologies in 2009 to enhance the in-house technology
development capabilities of the BSE and allow faster time-to-market for new products
• Launched a reporting platform for corporate bonds christened the ICDM or Indian
Corporate Debt Market
• Acquired a 15% stake in United Stock Exchange (USE) to drive the development and
growth of the currency and interest rate derivatives markets
• Launched 'BSE StAR MF' Mutual fund trading platform, which enables exchange
members to use its existing infrastructure for transaction in MF schemes.
• BSE now offers AMFI Certification for Mutual Fund Advisors through BSE Training
Institute (BTI)
• Co-location facilities for Algorithmic trading
• BSE also successfully launched the BSE IPO index and PSU website
• BSE revamped its website with wide range of new features like 'Live streaming quotes for
SENSEX companies', 'Advanced Stock Reach', 'SENSEX View', 'Market Galaxy', and
'Members'
• Launched 'BSE SENSEX MOBILE STREAMER'
http://en.wikipedia.org/wiki/Bombay_Stock_Exchange
http://www.bseindia.com/
http://www.asiaetrading.com/exchanges/india/bombay-stock-exchange/?offset=-4
MCX
Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It
was established in 2003 and is based in Mumbai. The turnover of the exchange for the period
Apr-Dec 2008 was INR 32 Trillion. MCX offers futures trading in Agricultural Commodities,
Bullion, Ferrous & Non-ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and
other soft commodities.
MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity
exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and
handling of agricultural products.
• MCX is India's No. 1 commodity exchange with 84% Market share in 2008($0.84
trillion)
• The exchange's competitor is National Commodity & Derivatives Exchange Ltd
• Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in
futures trading
• The crude volume touched 23.49 Miliion barrels on January 3, 2009
• The highest traded item is gold with an average monthly turnover of Rs 1.42 Trillion
($29 Billion).
• MCX has 10 strategic alliances with leading commodity exchange across the globe
08.09.2010.1 8
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
9. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
• The average daily turnover of MCX is about US$ 2.4 billion
• MCX now reaches out to about 500 cities in India with the help of about 10,000
trading terminals
• MCX COMDEX is India's first and only composite commodity futures price index
• MCX may soon start trading equities & equity-derivatives. SEBI will likely give green light
next month after MCX filed law-suit.
FE Editorial : Let MCX-SX in - Yahoo! India News - http://bit.ly/9jNExL
http://www.mcxindia.com/
United Stock Exchange of India Limited
The United Stock Exchange of India Limited (USE) has received final approval from the
Securities and Exchange Board of India (SEBI) to commence operations in currency futures in all
the four pairs of currencies, i.e. US Dollar - INR; EUR - INR ; Pound Sterling - INR; Japanese Yen
- INR.
In light of this approval, Bombay Stock Exchange Limited (BSE), the largest shareholder in USE,
has officially suspended its operations in the Currency Derivatives Segment.
Following SEBI approval, USE has vigorously launched its membership drive and over 150
members have already submitted their applications. Most of the members of BSE are expected to
join USE. In addition, new members from the banking fraternity and broking field have evinced
keen interest in the new exchange.
http://www.finextra.com/news/announcement.aspx?pressreleaseid=33370
Regional Exchanges
There are approximately 20 regional exchanges.
http://www.sebi.gov.in/investor/recog.html
http://www.findouter.com/Asia/India/Business_and_Economy/Finance/Exchanges/1
08.09.2010.1 9
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
10. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Clearing and Settlement
Stocks Settlement is T+2
Equities Clearing
Clearing is the process of determination of obligations, after which the obligations are discharged
by settlement.
National Securities Clearing Corporation Ltd
http://www.altiusdirectory.com/Finance/nsccl.html
http://www.mbaknol.com/financial-management/national-securities-clearing-corporation-ltd-nsccl/
The National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE,
was incorporated in August 1995. It was set up to bring and sustain confidence in clearing and
settlement of securities; to promote and maintain, short and consistent settlement cycles; to
provide counter-party risk guarantee, and to operate a tight risk containment system. NSCCL
commenced clearing operations in April 1996.
NSCCL carries out the clearing and settlement of the trades executed in the Equities and
Derivatives segments and operates Subsidiary General Ledger (SGL) for settlement of trades in
government securities. It assumes the counter-party risk of each member and guarantees
financial settlement. It also undertakes settlement of transactions on other stock exchanges like,
the Over the Counter Exchange of India.
NSCCL has successfully brought about an up-gradation of the clearing and settlement
procedures and has brought Indian financial markets in line with international markets.
NSCCL has two categories of clearing members: trading clearing members and custodians.
Trading members can trade on a proprietary basis or trade for their clients. All proprietary trades
become the member’s obligation for settlement. Where trading members trade on behalf of their
clients they could trade for normal clients or for clients who would be settling through their
custodians. Trades which are for settlement by Custodians are indicated with a Custodian
Participant (CP) code and the same is subject to confirmation by the respective Custodian. The
custodian is required to confirm settlement of these trades on T + 1 day by the cut-off time 1.00
p.m. Non-confirmation by custodian devolves the trade obligation on the member who had input
the trade for the respective client.
A multilateral netting procedure is adopted to determine the net settlement obligations
(delivery/receipt positions) of the clearing members. Accordingly, a clearing member would have
either pay-in or pay-out obligations for funds and securities separately. In the case of securities in
the Trade for Trade – Surveillance segment and auction trades, obligations are determined on a
gross basis i.e. every trade results into a deliverable and receivable obligation of funds and
securities. Members pay-in and pay-out obligations for funds and securities are determined by
2.30 p.m. on T + 1 day and are downloaded to them so that they can settle their obligations on
the settlement day (T+2).
08.09.2010.1 10
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
11. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
NSCCL follows a T+2 rolling settlement cycle. For all trades executed on the T day, NSCCL
determines the cumulative obligations of each member on the T+1 day and electronically
transfers the data to Clearing Members (CMs). All trades concluded during a particular trading
date are settled on a designated settlement day i.e. T+2 day. In case of short deliveries on the
T+2 day in the normal segment, NSCCL conducts a buy –in auction on the T+3 day and the
settlement for the same is completed on the T+4 day, whereas in case of W segment there is a
direct close out. For arriving at the settlement day all intervening holidays, which include bank
holidays, NSE holidays, Saturdays and Sundays are excluded. The settlement schedule for all
the settlement types in the manner explained above is communicated to the market participants
vide circular issued during the previous month.
Cleared and non-cleared deals
NSCCL carries out the clearing and settlement of trades executed on the exchange except Trade
for trade - physical segment of capital market. Primary responsibility of settling these deals rests
directly with the members and the Exchange only monitors the settlement. The parties are
required to report settlement of these deals to the Exchange.
Clearing Corporation of India Ltd.
http://www.ccilindia.com
The Clearing Corporation of India Ltd. (CCIL) was set up in April, 2001 for providing exclusive
clearing and settlement for transactions in Money, GSecs and Foreign Exchange. The prime
objective has been to improve efficiency in the transaction settlement process, insulate the
financial system from shocks emanating from operations related issues, and to undertake other
related activities that would help to broaden and deepen the money, debt and forex markets in
the country. The company commenced operations on February 15, 2002 when the Negotiated
Dealing System (NDS) of RBI went live. CCIL started providing the settlement of forex
transactions since November 2002. CCIL launched the Collateralised Borrowing and Lending
Obligation (CBLO) in January 2003, a money market product based on Gilts as collaterals. It has
developed a forex trading platform “FX-CLEAR” which went live on August 7, 2003. CCIL has
started the settlement of cross-currency deals through the CLS Bank from April 6, 2005. At the
request of RBI, CCIL developed and currently manages the NDS-OM and NDS-CALL electronic
trading platforms for trading in the government securities and call money. It has also developed
the NDS-Auction module for Treasury Bills auction by RBI. CCIL has received the ISO/IEC
27001:2005 certification from M/s Det Norsk Veritas in 2006 for securing its information assets.
08.09.2010.1 11
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
12. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Technology / Infrastructure
Internet / Leased Line Connectivity
NSE
NSE developed a new trading application, NOW,or ‘NEAT on Web’. The NOW platform allows
trading members to connect to the exchange through the internet, and has resulted in a
significant reduction in both the access cost and turnaround time for providing access.
NSE, with cisco, has also set up a fibre ring across the country that runs through Delhi, Chennai,
Kolkata and Mumbai. Each of the four cities has a PoP through which a member, say in Delhi,
can be connected to the Delhi PoP. According to NSE officials, since this link is managed by the
bourse, not only is it more reliable, but it has increased the speed of trading from 100
milliseconds earlier to just 30 milliseconds currently.
http://economictimes.indiatimes.com/articleshow/5996353.cms
BSE
On-line trading (BOLT) currently has a capacity of 80 lakh orders per day. The BSE has also
introduced the world's first centralized exchange-based internet trading system, BSEWEBx.co.in
to enable investors anywhere in the world to trade on the BSE platform.
BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000
certification. It is also the first Exchange in the country and second in the world to receive
Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-
Line trading System (BOLT). Presently, BSE are ISO 27001:2005 certified, which is a ISO version
of BS 7799 for Information Security.
Co-location
NSE
NSE is currently providing co-location facilities for their members’ servers.
Latency within the exchange – the time it takes for an order to make the round trip through the
computer system – is five (5) milliseconds and is set to fall to sub-one millisecond by the end of
the year.
All applications (i.e., black box algos) must be approved by the NSE prior to trading. The approval
process can be completed in 2 weeks or less by someone familiar with the process but can ne
daunting for others.
Approximately 60 pre-trade risk parameters are tested as part of the approval process.
Order flow is limited by the exchange to 200 orders per second from within the exchange. Order
flow from outside the exchange is limited to 40 orders per second.
08.09.2010.1 12
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
13. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
BSE
BSE has entered in to a partnership to provide co-location services with NetMagic and has
indicated it will provide space at its own facilities until the NetMAgic facility is available.
The Bombay Stock Exchange also entered into an agreement with the exchange solutions provider NYSE Tech to offer
high speed trading facility.
The empanelment of NYSE Technologies, which is a part of NYSE Euronext, by the BSE would help to offer high speed
and low latency trading supporting automated trading by its members and their customers.
http://blog.finetik.com/2010/02/27/india-co-location-services-at-bse-premises/
FIX Connectivity
NSE
FIX is supported by the NSE however, the FIX implementation is via an adapter (or translator) to
the NSE’s native protocol. Performance is most likely not suitable for high performance trading
due to the additional overhead introduced.
Citi backs global Fix standard in India - http://goo.gl/m7Lt
BSE
BSE is listed as a member organization for FIX protocol.
http://www.fixprotocol.org/members/
MCX
MCX supports FIX protocol.
AES
Credit Suisse launched its Advanced Execution Services (AES) platform in India in 2009 which
enables algorithmic trading via advanced algorithms such as TWAP, VWAP etc.
http://www.automatedtrader.net/headlines/12480/credit-suisse-launches-algorithmic-trading-in-
india
Smart Order Routing
As of August 27, 2010, Sebi has allowed bourses to trade through Smart Order Routing (SOR),
which is an exchange neutral trading platform for automatic searches for best prices for executing
a buy-sell order.
Sebi permits bourses to go for Smart Order Routing - http://bit.ly/cnR10Z
08.09.2010.1 13
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
14. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Market Data
Market Data for exchanges in India is widely available from various sources.
eSignal
http://www.esignal.com/exchanges/asia_pac.aspx
CQG, Inc.,
the industry-leading order execution, charting, and analytics provider for global electronically-
traded futures markets, has added the Multi Commodity Exchange of India (MCX), India’s highest
volume commodity exchange, to its extensive list of market data sources.
http://www.cqg.com/
Reuters
http://thomsonreuters.com/content/press_room/tf/tf_gen_business/2009_03_23_bombay_stock_e
xchange
Transaction Costs
Sridhar Vaidyanathan, COO at Geojit BNP Paribas Financial Services Ltd said the cost of using
direct market access is higher when compared with other more developed markets where the
costs can be 1-2 bps as opposed to 5-8 bps in India.
http://www.dnaindia.com/money/report_algorithmic-trading-gets-a-second-wind_1269366
Exchange Fees
BSE
The present duty for equity shares transfer is 25paise for every Rs.100 or part thereof, on the
amount of consideration while the duty for transfer of debentures varies from state to state,
applicable on the basis of the location of the registered office of the concerned issuing company.
Regulatory Charges
Securities Transaction Tax (STT)
Note:
Securities transaction tax abolition, rate revision on the table. The securities transaction tax
(STT), whose abolition has been a long-pending demand from investors, will be reviewed when
the government overhauls the capital gains tax regime. At present, investors who pay STT are
exempt from capital gains when they sell their shares one year after holding them. The original
code had proposed scrapping STT and levying capital gains tax, (June 19, 2010)
http://economictimes.indiatimes.com/news/economy/finance/Securities-transaction-tax-abolition-
rate-revision-on-the-table/articleshow/6065582.cms
08.09.2010.1 14
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
15. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Equity Delivery Transactions
Purchase: 0.125% of Turnover i.e. (Number of Shares * Price)
Sell: 0.125% of Turnover i.e. (Number of Shares * Price)
Equity Intra-day Transactions
Purchase: NIL
Sell: 0.025% of Turnover i.e. (Number of Shares * Price)
Future Transactions
Purchase: NIL
Sell: 0.017% of Turnover i.e. (Number of Lots * Lot Size * Price)
Option Transactions
Purchase: NIL at the time of purchase of option. However the purchaser has to pay 0.125% of the
Settlement Price i.e. (Number of Lots * Lot Size * Strike Price), in case of option exercise
Sell: 0.017% of Premium
Transaction Charges
Equity Delivery Transactions
Purchase: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
Sell: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
Equity Intra-day Transactions
Purchase: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
Sell: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
Future Transactions
Purchase: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Sell: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Option Transactions
Purchase: 0.05% of Premium
Sell: 0.05% of Premium
SEBI Turnover Charges
Equity Delivery Transactions
Purchase: NIL
Sell: NIL
Equity Intra-day Transactions
Purchase: NIL
Sell: NIL
Future Transactions
08.09.2010.1 15
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
16. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Purchase: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Sell: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Option Transactions
Purchase: 0.0002% of Premium
Sell: 0.0002% of Notional Value in case of exercise or assignment
Stamp Duty
Equity Delivery Transactions
Purchase: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
Equity Intra-day Transactions
Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Future Transactions
Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Option Transactions
Purchase: 0.002% of Premium
Sell: 0.002% of Notional Value in case of exercise or assignment
Service Tax
Service Tax, Surcharge and Education Cess are applicable on Brokerage, Transaction Charges,
SEBI Turnover Charges and Stamp Duty. Note Service Tax, Surcharge and Education Cess are
not applicable on Securities Transaction Tax (STT).
BSE
BSE has a liquidity maker / taker fee schedule on equity derivatives:
Transaction charges applicable for Passive (Maker) orders inclusive of IPF and TGF charges
Stock Futures and Index futures – Pay 1 Rupees per lakh (lakh = 100,000)
Stock Options and Index options – Pay 15 Rupees per lakh (lakh = 100,000)
Transaction charges applicable for Active (Taker) orders inclusive of IPF and TGF charges
Stock Futures and Index futures – Charge 1.5 Rupees per lakh (lakh = 100,000)
Stock Options and Index options – Charge 20 Rupees per lakh (lakh = 100,000)
http://www.asiaetrading.com/bse-introduces-maker-taker-charges-in-the-equity-derivatives-
segment/
08.09.2010.1 16
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
17. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Institutional Brokers / Prime Brokers
FIIs are required to open up one or more bank accounts with certain designated banks and must
also appoint a domestic custodian for custody of investment made by the FII. Through the
designated accounts, FIIs are authorized to freely transfer funds from foreign currency accounts
to Rupee accounts and vice versa; make Rupee denominated investments in Indian companies;
freely transfer after-tax proceeds from Rupee accounts to foreign currency accounts, and
repatriate capital, capital gain, dividends interest income and other gains, subject to deduction for
applicable withholding taxes.
Kotak-UK is one of the largest Indian Prime-brokers for FIIs
http://en.wikipedia.org/wiki/Kotak_Mahindra_Bank
All major global banks and brokerages are present in India including:
Credit Suisse
Goldman Sachs
HSBC
ICICI
JP Morgan Chase
Macquarie Capital Securities
MF Global
Morgan Stanley
UBS
http://nsemumbaibull.financial.officelive.com/IndianStockBrokers.aspx
Custodians
http://www.sebi.gov.in/investor/fii15.html
Many major global banks are authorized custodians including:
ABN Amro
BNP Paribas
Citi
Deutsche Bank
HSBC
JP Morgan
Standard Charter
08.09.2010.1 17
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
18. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Human Capital and Supporting Services
The primary sources of talent are competitors or service providers, academia,
and returning ex-pats.
To establish and maintain a viable long term business in India it is imperative to have a workforce
and service provider ecosystem capable of supporting the full life cycle of the business including:
In-house
• Analysts
• Traders
• Quants / Software Developers
• Systems Engineers, Technicians and Administrators
• Back & Middle Office Trade Support
Supporting Services
• Accountants
• Administrators
• Prime Brokers / Executing Brokers
• Custodians
• Clearing & Settlement / Central Counter Party
Competitors and Service Providers as Source of Talent
Top companies from the United Kingdom and the United States among others are already active
in India's financial markets. Some of the big names are: Goldman Sachs Merrill Lynch,
Oppenheimer, J.P. Morgan, Morgan Stanley, Grindlays, Standard Chartered, Hong Kong
and Shanghai Banking Corporation among others.
Academia
Indian universities are acknowledged as world class and are turning out graduates in math,
science and engineering in mass quantities. Furthermore, the India university grads embrace a
collegial spirit of networking and seem to actively support and promote the advancement of their
classmates’ careers. Many of these grads will go overseas to the U.S. or the U.K. to work for
multi-national financial institutions.
Returning Ex-Pats
Many Indian nationals have worked for the companies mentioned above as well as others over
seas (the U.S. alone admits approximately 65,000 per year in professional roles through the H1-B
visa program) and are returning home to a lower cost of living and higher wages as a result of
their experience and gained knowledge.
08.09.2010.1 18
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com
19. ALGORITHMIC TRADING IN INDIA WILLARD JOHN THOMAS ASSOCIATES
Caveats
STT (securities transaction tax) is between 1.7 and 2.5 basis points (only on sell part) for a two-
way transaction for futures and cash respectively. With transaction fees and stamp duty, the cost
climbs to between 2 and 3 basis points per transaction overall.
Brokerage – Exchange members may enjoy zero fees, but retail will pay 1/2 basis point to 2 basis
points as additional cost.
5-6 basis points for a market making transaction is required for profitability..
VWAP algos possible in liquid stocks (Cash market. After the top 30 stocks, every stock trades
less than $5 million (25 cr.) per day. That means you can't move much volume on VWAP, and
you don't get a deep order book to hit market.
VWAP in India mostly implies the weighted average of the last 30 min of trading. Funds want last
30 min VWAP because it’s what the closing price prints.
Option strategies can such as traditional triangles to risk or statistical butterflies, IV arb etc. but
these have associated execution risk. Liquidity is low in non Nifty options, so cash deployable is
probably <10cr.
Additionally in India, you have the issue of options exercisable in cash, meaning your offset
position is naked. When you hold an ITM option that gets exercised at 5 pm you can do nothing.
http://blog.investraction.com/2010/06/algorithmic-trading-possible-in-india.html
08.09.2010.1 19
All materials copyright or otherwise which are referenced herein are the property of their respective
owners.
ALL ELSE COPYRIGHT 2010 WILLARD JOHN THOMAS ASSOCIATES ALL RIGHTS RESERVED
Contact: info@wjtcapital.com www.wjtcapital.com