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Structural Issues Concerning Algorithmic Trading in India

Structural Issues Concerning Algorithmic Trading in India

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Published by: prasadpatankar9 on Aug 07, 2012
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1
 
Structural
 
Issues
 
Concerning
 
Algorithm
 
Trading
 
in
 
India
 
Index
Sr
 
No
 
Topic Page
 
Number1
 
Introduction
 
to
 
Algorithm
 
Trading
 
2
 
2
 
High
 
Frequency
 
Trading
 
9
 
3
 
Algorithm
 
Trading
 
Vs
 
High
 
Frequency
 
Trading
 
11
 
4
 
Algorithm
 
Trading
 
in
 
Asia
Pacific
 
12
 
5
 
Evolution
 
of 
 
Electronic
 
Trading
 
in
 
India 14
 
6
 
Smart
 
Order
 
Routing,
 
DMA
 
and
 
Colocation 15
 
7
 
Current
 
infrastructure
 
in
 
India
 
18
 
8
 
Current
 
Trade
 
Structure
 
in
 
US
 
&
 
India
 
20
 
9
 
HFT
 
and
 
its
 
impact
 
on
 
Market
 
Quality
 
23
 
9.1
 
Data
 
Sample
 
23
 
9.2
 
HFT
 
activity
 
in
 
US
 
24
 
9.3
 
Do
 
HFTs
 
flee
 
in
 
volatile
 
markets?
 
25
 
9.4
 
Do
 
HFTs
 
contribute
 
to
 
Price
 
Discovery
 
Process?
 
27
 
9.5
 
What
 
role
 
HFT
 
plays
 
in
 
providing
 
market
 
liquidity? 28
 
9.6
 
Do
 
HFT
 
generate
 
or
 
dampen
 
volatility? 31
 
10
 
Possible
 
Manipulations
 
Using
 
HFT/Algorithmic
 
Trading
 
33
 
11
 
Current
 
Risk
 
Management
 
framework
 
in
 
India
 
39
 
12
 
Algo
 
approval,
 
registration
 
and
 
risk
 
management
 
framework
 
43
 
13
 
Concerns
 
45
 
14
 
Recommendations
 
49
 
15
 
Conclusion
 
54
 
Annexure
Sr
 
No
 
Topic
 
Page
 
Number
 
1
 
Risk
 
management
 
criteria’s
 
for
 
approval
 
of 
 
DMA
 
facility
 
at
 
NSE
 
55
 
2
 
Procedure
 
for
 
granting
 
permission
 
to
 
Trading
 
Member
 
for
 
Algorithm
 
Trading
 
57
 
3
 
Current
 
Risk
 
Management
 
framework
 
in
 
India
 
58
 
4
 
Algorithmic
 
and
 
High
 
Frequency
 
Strategies
 
66
 
5
 
Execution
 
strategies
 
70
 
 
2
 
Structural
 
Issues
 
Concerning
 
Algorithm
 
Trading
 
in
 
India
 
Chapter
 
1
 
Introduction
 
to
 
Algorithm
 
Trading
 
Definition
 
of 
 
algorithm
 
trading
 
Algorithm
 
trading
 
refers
 
to
 
automated
 
trading
 
based
 
on
 
algorithm.
 
The
 
purpose
 
of 
 
using
 
automatic
 
trading
 
is
 
to
 
analyze
 
price
 
and
 
market
 
conditions
 
in
 
order
 
to
 
trade
 
at
 
the
 
minimum
 
cost
 
based
 
on
 
the
 
relevant
 
algorithm
 
method.
 
Algorithmic
 
Trading
 
can
 
be
 
defined
 
as
 
the
 
use
 
of 
 
computer
 
programs
 
for
 
entering
 
trading
 
orders
 
where
 
the
 
computer
 
algorithm
 
decides
 
on
 
aspects
 
of 
 
the
 
trade
 
execution
 
such
 
as
 
the
 
timing,
 
price,
 
or
 
quantity
 
of 
 
the
 
order.
 
Algorithm
 
Trading
 
is
 
also
 
known
 
as
 
automated
 
trading,
 
algo
 
trading,
 
black
box
 
trading
 
or
 
robo
 
trading.
 
Algorithms
 
dynamically
 
monitor
 
market
 
conditions
 
across
 
different
 
securities
 
and
 
trading
 
venues
 
to
 
make
 
the
 
trade
 
execution
 
decision.
 
Algorithmic
 
trading
 
(AT)
 
is
 
more
 
complex
 
than
 
electronic
 
trading
 
and
 
it
 
encompasses
 
many
 
form
 
of 
 
computer
aided
 
trading
 
including
 
High
 
Frequency
 
Trading.
 
Algorithmic
 
Trading
 
is
 
widely
 
used
 
by
 
pension
 
funds,
 
mutual
 
funds,
 
and
 
other
 
buy
 
side
 
(investor
 
driven)
 
institutional
 
traders,
 
to
 
divide
 
large
 
trades
 
into
 
several
 
smaller
 
trades
 
in
 
order
 
to
 
manage
 
market
 
impact,
 
and
 
risk.
 
In
 
fact,
 
algorithms
 
were
 
originally
 
developed
 
for
 
use
 
by
 
the
 
buy
side
 
to
 
manage
 
orders
 
and
 
to
 
reduce
 
market
 
impact
 
by
 
optimising
 
trade
 
execution
 
once
 
the
 
buy
and
 
sell
 
decisions
 
had
 
been
 
made
 
elsewhere.
 
Sell
 
side
 
traders,
 
such
 
as
 
market
 
makers
 
and
 
some
 
hedge
 
funds,
 
provide
 
liquidity
 
to
 
the
 
market
 
by
 
generating
 
and
 
executing
 
orders
 
automatically
 
with
 
the
 
help
 
of 
 
algorithms.
 
Algorithm
 
trading
 
focuses
 
on
 
minimizing
 
the
 
market
 
impact
 
by
 
splitting
 
trades.
 
Algorithm
 
trading
 
was
 
originally
 
developed
 
as
 
an
 
order
 
placement
 
system
 
for
 
the
 
purpose
 
of 
 
minimizing
 
trading
 
cost,
 
but
 
it
 
is
 
now
 
being
 
used
 
as
 
an
 
overall
 
term
 
to
 
describe
 
its
 
strategy
 
and
 
process.
 
 
3
 
Structural
 
Issues
 
Concerning
 
Algorithm
 
Trading
 
in
 
India
 
Types
 
of 
 
Algorithm
 
Trading
 
Algorithm
 
Trading
 
is
 
broadly
 
categorised
 
into
 
High
 
frequency
 
trading,
 
Basket
 
Trading,
 
Multi
 
Exchange
 
trading
 
and
 
Situational
 
Algorithm
 
Trading
 
category.
 
Basket
 
Trading
 
(Program
 
trading)
 
is
 
generally
 
used
 
for
 
stock
 
basket
 
trading.
 
Multi
exchange
 
trading
 
is
 
trading
 
a
 
product
 
across
 
different
 
exchanges
 
using
 
computer
 
algorithm.
 
Multi
 
exchange
 
trading
 
is
 
facilitated
 
by
 
Smart
 
Order
 
Routing
 
algorithms.
 
Smart
 
order
 
routing
 
is
 
a
 
technique
 
of 
 
using
 
the
 
close
 
correlation
 
of 
 
major
 
exchanges
 
and
 
cross
listing
 
of 
 
a
 
company—i.e.,
 
placing
 
orders
 
on
 
an
 
exchange
 
where
 
the
 
most
 
favourable
 
conditions
 
are
 
seen.
 
In
 
India,
 
SEBI
 
allowed
 
use
 
of 
 
Smart
 
Order
 
routing
 
in
 
August
 
2010
 
and
 
currently
 
it
 
is
 
operational
 
in
 
both
 
Capital
 
Market
 
as
 
well
 
as
 
Currency
 
Derivative
 
Segment.
 
Flash
 
Trading
 
refers
 
to
 
practice
 
in
 
US
 
to
 
flash
 
orders
 
for
 
few
 
seconds
 
to
 
select
 
members
 
before
 
submitting
 
it
 
to
 
order
 
matching
 
platform.
 
Situational
 
algorithm
 
trading
 
category
 
hereafter
 
referred
 
as
 
Algorithm
 
Trading
 
/
 
Algorithmic
 
Trading/AT
 
interchangeably,
 
refers
 
to
 
any
 
and
 
all
 
kind
 
of 
 
computer
 
aided
 
trading
 
which
 
does
 
not
 
fall
 
under
 
first
 
three
 
categories.
 
Situational
 
algorithm
 
determines
 
what
 
to
 
trade,
 
when
 
to
 
trade
 
and
 
how
 
to
 
trade
 
Strategies
 
or
 
algorithms
 
used
 
by
 
the
 
computer
 
to
 
automate
 
(enter,
 
modify
 
or
 
cancel)
 
trade
 
orders
 
are
 
called
 
algorithmic
 
trading
 
strategies
 
and
 
they
 
are
 
broadly
 
classified
 
as
 
execution
 
strategies,
 
profit
 
seeking
 
strategies
 
(Alpha
 
strategies)
 
and
 
arbitrage
 
strategies.
 
Arbitrage
 
strategies
 
The
 
simultaneous
 
purchase
 
and
 
sale
 
of 
 
an
 
asset
 
in
 
order
 
to
 
profit
 
from
 
a
 
difference
 
in
 
the
 
price.
 
It
 
is
 
a
 
trade
 
that
 
profits
 
by
 
exploiting
 
price
 
differences
 
of 
 
identical
 
or
 
similar
 
financial
 
instruments,
 
on
 
different
 
markets
 
or
 
in
 
different
 
forms.
 
Arbitrage
 
exists
 
as
 
a
 
result
 
of 
 
market
 
inefficiencies;
 
it
 
provides
 
a
 
mechanism
 
to
 
ensure
 
prices
 
do
 
not
 
deviate
 
substantially
 
from
 
fair
 
value
 
for
 
long
 
periods
 
of 
 
time
.
 
Algorithm
 
Trading
High
 
Frequency
 
TradingBasket
 
Trading
 
(Programm
 
Trading)MultiExchange
 
Trading
 
(Trading
 
using
 
SOR)Flash
 
TradingSituational
 
Algorithmic
 
Trading

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