DMA…Welcome to India

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.