At last the Securities & Exchange Board of India (SEBI) has agreed to allow Direct Market Access (DMA) which will facilitate wire speed Straight Through Processing (STP) on the exchanges. If the previous sentence is as difficult to understand as Kevin Federline’s role in life then you may want to pass on this blog entry.
Let me try and demystify the above (as far as Kevin Federline…no clue):
India will allow computers to make buy/sell decisions and issue those orders directly to the exchanges via a broker.
Previously a broker was required to hit the enter key once the order was received from a client. The announcement although technical in nature will change the landscape of the Indian markets. Similar to the announcement back in the early 90’s that Foreign Institutional Investor’s (FII’s) would be allowed trading access to India.
Pros:
- lower impact costs for FII’s
- less chance of errors
- wire speed transactions
- allow computer driven trading algorithms
- potentially greater volumes
Cons:
- local brokers will no longer see “order flow” from clients. Granted the orders have to hit the brokers infrastructure but the ability to act on that information is much more difficult.
- arbitrage shops who will have to settle for a smaller spread or move to a computer driven model
On a personal level this is very exciting for me as it combines two of my passions: technology and the capital markets.
Trivia: The very first FII to register with SEBI was Pictet, a private Swiss bank, in June 1993.
2 responses so far ↓
1 Pankaj // Apr 6, 2008 at 9:48 pm
Manish,
Great post and though I haven’t been keeping up with the Indian markets as I should, like you said this announcement could very well change the Indian markets as drastically, if not more, than the early 90’s.
Like you said, those fat commissions that the brokers were used to earning are going to force some belt tightening…more so than the Indian markets have already forced upon traders and investors over the last 3 months.
I do think this could be a very strong catalyst for the creation of more indigenous funds as well as an increase in trading by international funds. I can see stat-arb funds salivating at the chance to play in the volatility of the Indian market. This would create a need for better prime brokerage services here in India itself. The potential increase in funds operating in India is an opportunity for the biggies to reclaim some of those lost commissions and potentially grow those revenues faster.
Looking forward to reading more about this.
Cheers,
Pankaj
2 Deepak Shenoy // Apr 13, 2008 at 1:26 pm
This, along with short selling, makes life very interesting. I’m a tech-plus-market person myself and like you I find this extremely attractive.
To add to what you said: I think DMA is going to avoid front running, and allow large order execution to be spread using computer driven models rather than broker discretion.
Arbs are already heavily hit with the STT treatment, and with lower spreads due to computer modelling they will likely be out. And they need to be, because this is much better with computers. I’d started on a retail DMA model for classic arb (retail investors buy orders still go direct to the exchange, and there is a way to automate that) but then the spreads narrowed too much since Jan.
Maybe we should talk - I got here through your linked in page. Will send you a mail.
Leave a Comment