Ashish Rukhaiyar
Mumbai, August 21, 2010
While welcoming the regulator’s move to raise the retail investment limit in public issues, investment bankers say a lot more needs to be done to attract small investors to the equity market.
According to a section of investment bankers, the Securities and Exchange Board of India (Sebi) should look at a graded structure, wherein the cap on the individual investment limit corresponds with the size of the offer.
In other words, the larger the issue, the higher should be the investment limit for retail investors, they say. This, according to them, will lead to significant participation by retail investors. Also, high net worth individuals (HNIs) will vie for allocation only within the non-institutional investor portion, they say.
“A graded structure will work fine in the Indian market given the range of issue size,” says the head of a leading foreign investment banking entity. “Here, we have issues as small as Rs 45 crore to as big as thousands of crores of rupees. A cap, obviously, cannot serve the purpose. For an issue of, say, more than Rs 15,000 crore, we could cap retail applications at Rs 5 lakh,” he said.
Sebi, in a discussion paper released on Wednesday, proposed enhancing the retail investment limit in public issues to Rs 2 lakh from Rs 1 lakh, which was set more than five years ago. Sebi says approximately 75 per cent applications in the retail segment in recent issues have been in the range of Rs 80,000 to Rs 1 lakh. Market participants have been asked to submit comments on the proposal before September 3.
Another investment banker cites the example of the forthcoming initial public offer (IPO) of Coal India Ltd in which the retail segment size is expected to be more than Rs 4,000 crore. “Assuming that every single retail investor puts in an application for Rs 2 lakh, we will require more than two lakh applications for the retail segment to be subscribed one time,” he said.
“Sebi’s analysis shows that the number of retail applications was in the range of 35,000 to 70,000 in some of the recent issues that were ‘well oversubscribed’,” he said.
Prithvi Haldea of Prime Database, however, differs, saying that “there are enough instances of issues where lakhs and lakhs of investors put in bids”. “Look at the statistics of Maruti or VSNL, or even Reliance Power. The number of applications was huge. If we increase the cap (on retail investment limit), we will be creating a sub-HNI segment,” said Haldea.
Friday, 31 December 2010
Interest rate futures fail to click
Ashish Rukhaiyar
Mumbai, August 18, 2010
Worries about liquidity holding back growth, say players.
Volumes in interest rate futures (IRF) have failed to pick up. The market has been operational for nearly a year. According to the latest data released by the market regulator, April-June saw volumes dip to a paltry Rs 46 crore.
Experts say uncertainty over liquidity of the underlying bonds is holding back players from venturing into this space. According to a report by the Securities and Exchange Board of India (Sebi), the turnover on the IRF platform dropped 84 per cent sequentially between April and June.
“During the quarter under review, volume fell 84.04 per cent, while turnover decreased 84.01 per cent over January-March,” says the Sebi report. In absolute terms, 2,501 IRF contracts were traded between April and June, with the total value a paltry Rs 46 crore. This is significantly lower than the 15,668 contracts with a value of Rs 287.6 crore that were traded between January and March.
At the end of the last trading day, open interest in terms of the number of contracts decreased 17 per cent while in value terms, it fell 14.8 per cent during the June quarter over the previous quarter, according to Sebi. Total delivery during the month, as a percentage of open interest on the first day of the delivery month (June), was 71 per cent, signifying that a large proportion of open interest subsisting on the first day of the delivery month resulted in delivery of government of India bonds.
Experts say the joint technical committee set up to frame the guidelines and the contract specifications for the IRF market will soon have to tweak the current structure to make it more attractive for market players. The technical committee has representations from Sebi and the Reserve Bank of India.
“The easiest solution will be to settle the IRF contract on a specified underlying, which needs to be mentioned at the time of entering into the contract,” says Susan Thomas of the Indira Gandhi Institute of Development Research. “This will remove the element of uncertainty.”
Another bond dealer, who did not wish to be named, says the common concern among marketmen is that they could get “hit” with illiquid bonds. “If you take delivery, there is always this fear of ending up with bonds that cannot be sold. If you look at some of the overseas markets, the dealers can sell the bonds they don’t like. This is not the case in India, where the underlying market is not liquid,” he explains.
According to data with the National Stock Exchange, the only exchange to offer trading facility in IRF, only one contract was traded in the IRF segment on most days in August, with average value of less than Rs 2 lakh.
The current regulatory framework allows participants to settle the contracts with delivery of securities with a tenor between nine and 12 years. Incidentally, the tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time the launch was launched.
“Currently, the responsibility of settlement is randomly assigned. One can deliver anything within the basket and one would tend to deliver the cheapest, which would also be the most illiquid,” says Thomas.
Mumbai, August 18, 2010
Worries about liquidity holding back growth, say players.
Volumes in interest rate futures (IRF) have failed to pick up. The market has been operational for nearly a year. According to the latest data released by the market regulator, April-June saw volumes dip to a paltry Rs 46 crore.
Experts say uncertainty over liquidity of the underlying bonds is holding back players from venturing into this space. According to a report by the Securities and Exchange Board of India (Sebi), the turnover on the IRF platform dropped 84 per cent sequentially between April and June.
“During the quarter under review, volume fell 84.04 per cent, while turnover decreased 84.01 per cent over January-March,” says the Sebi report. In absolute terms, 2,501 IRF contracts were traded between April and June, with the total value a paltry Rs 46 crore. This is significantly lower than the 15,668 contracts with a value of Rs 287.6 crore that were traded between January and March.
At the end of the last trading day, open interest in terms of the number of contracts decreased 17 per cent while in value terms, it fell 14.8 per cent during the June quarter over the previous quarter, according to Sebi. Total delivery during the month, as a percentage of open interest on the first day of the delivery month (June), was 71 per cent, signifying that a large proportion of open interest subsisting on the first day of the delivery month resulted in delivery of government of India bonds.
Experts say the joint technical committee set up to frame the guidelines and the contract specifications for the IRF market will soon have to tweak the current structure to make it more attractive for market players. The technical committee has representations from Sebi and the Reserve Bank of India.
“The easiest solution will be to settle the IRF contract on a specified underlying, which needs to be mentioned at the time of entering into the contract,” says Susan Thomas of the Indira Gandhi Institute of Development Research. “This will remove the element of uncertainty.”
Another bond dealer, who did not wish to be named, says the common concern among marketmen is that they could get “hit” with illiquid bonds. “If you take delivery, there is always this fear of ending up with bonds that cannot be sold. If you look at some of the overseas markets, the dealers can sell the bonds they don’t like. This is not the case in India, where the underlying market is not liquid,” he explains.
According to data with the National Stock Exchange, the only exchange to offer trading facility in IRF, only one contract was traded in the IRF segment on most days in August, with average value of less than Rs 2 lakh.
The current regulatory framework allows participants to settle the contracts with delivery of securities with a tenor between nine and 12 years. Incidentally, the tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time the launch was launched.
“Currently, the responsibility of settlement is randomly assigned. One can deliver anything within the basket and one would tend to deliver the cheapest, which would also be the most illiquid,” says Thomas.
Brokerages increase exposure to derivatives
Ashish Rukhaiyar
Mumbai, August 13, 2010
With client activity on a decline, brokerages are sitting idle on the working capital that would have typically gone into infrastructure expansion during a bull run. As the markets stay range-bound and business expansion plans are pushed onto the backburner, brokerages have found a new avenue for generating better yields on their cash reserves — derivatives.
According to the Securities and Exchange Board of India’s latest report on the derivatives segment, the share of proprietary trading in the futures and options segment was more than 34 per cent during April-June. This was a rise of more than four per cent over the first three months of this calendar year.
“While client trading decreased (5.3 per cent), both proprietary (4.4 per cent) and foreign institutional investor (one per cent) trading increased in this quarter, compared to the previous quarter,” noted the report. The report put the share of client trading in the F&O segment at 54.53 per cent. Meanwhile, proprietary trading constituted 34.32 per cent and that of foreign institutional investors (FIIs) was pegged at 11.15 per cent.
Market experts attributed the trend primarily to the low “activity ratio” that put more free cash on the books of brokerages. As a result, brokerages are using the cash for treasury operations by trading in derivatives or using it for arbitrage operations.
“Unlike last year, the activity ratio this year has been quite low, with most categories of investors staying away from the market. This has left brokerages with free cash reserves or working capital,” said Dinesh Thakkar, chairman and managing director, Angel Broking. “Brokerages are using this free capital for treasury operations by doing arbitrage trades or trading in derivatives. This increases the yield on the cash.”
The share of proprietary trading in the derivatives segment, interestingly, appears to be at the highest levels in the last couple of years. Since the beginning of 2008, the average share of proprietary trading has been hovering around 30-31 per cent for most months. For instance, between January and March 2009, proprietary trading accounted for 31.21 per cent of the total volume. The average for the quarter ended March 31, 2010, was pegged at 29.93 per cent. Meanwhile, in the last two years, the share of client trading has fallen consistently from over 60 per cent to 55 per cent.
Motilal Oswal Financial Services CMD, Motilal Oswal, feels arbitrage trading in the derivatives segment of brokerages has risen when activity from clients and institutional investors is on the downslide. “The return on capital is low if left idle. The best way to deploy money is to use it in arbitrage opportunities,” he said.
Mumbai, August 13, 2010
With client activity on a decline, brokerages are sitting idle on the working capital that would have typically gone into infrastructure expansion during a bull run. As the markets stay range-bound and business expansion plans are pushed onto the backburner, brokerages have found a new avenue for generating better yields on their cash reserves — derivatives.
According to the Securities and Exchange Board of India’s latest report on the derivatives segment, the share of proprietary trading in the futures and options segment was more than 34 per cent during April-June. This was a rise of more than four per cent over the first three months of this calendar year.
“While client trading decreased (5.3 per cent), both proprietary (4.4 per cent) and foreign institutional investor (one per cent) trading increased in this quarter, compared to the previous quarter,” noted the report. The report put the share of client trading in the F&O segment at 54.53 per cent. Meanwhile, proprietary trading constituted 34.32 per cent and that of foreign institutional investors (FIIs) was pegged at 11.15 per cent.
Market experts attributed the trend primarily to the low “activity ratio” that put more free cash on the books of brokerages. As a result, brokerages are using the cash for treasury operations by trading in derivatives or using it for arbitrage operations.
“Unlike last year, the activity ratio this year has been quite low, with most categories of investors staying away from the market. This has left brokerages with free cash reserves or working capital,” said Dinesh Thakkar, chairman and managing director, Angel Broking. “Brokerages are using this free capital for treasury operations by doing arbitrage trades or trading in derivatives. This increases the yield on the cash.”
The share of proprietary trading in the derivatives segment, interestingly, appears to be at the highest levels in the last couple of years. Since the beginning of 2008, the average share of proprietary trading has been hovering around 30-31 per cent for most months. For instance, between January and March 2009, proprietary trading accounted for 31.21 per cent of the total volume. The average for the quarter ended March 31, 2010, was pegged at 29.93 per cent. Meanwhile, in the last two years, the share of client trading has fallen consistently from over 60 per cent to 55 per cent.
Motilal Oswal Financial Services CMD, Motilal Oswal, feels arbitrage trading in the derivatives segment of brokerages has risen when activity from clients and institutional investors is on the downslide. “The return on capital is low if left idle. The best way to deploy money is to use it in arbitrage opportunities,” he said.
Industry wants holding cap in exchanges raised
Ashish Rukhaiyar & Palak Shah
Mumbai, August 11, 2010
Domestic institutions can hold up to 15% stake.
Market participants want the regulator to increase the maximum permissible holding for domestic institutions in stock exchanges from the current 15 per cent to 25 per cent.
At present, investors who can buy up to 15 per cent in a stock exchange include domestic banks and financial institutions, clearing corporations, depositories and stock exchanges.
This is one of the important proposals put forward by a section of the industry before the Bimal Jalan committee, set up to review the ownership and governance of market infrastructure institutions. The committee’s report is expected next month.
Industry players feel the current cap of 15 per cent for financial institutions acts as a road block in attracting genuine investors. Incidentally, when the norms were first promulgated, the cap was five per cent. Only later were certain categories of investors, including stock exchanges, allowed to increase their share to 15 per cent.
According to people familiar with the development, the industry suggestion also stems from the fact that the proposed takeover norms stipulate increasing the open offer threshold to 25 per cent from the current 15 per cent.
“Institutions want the committee to align the structure with the proposed takeover norms and also with the Companies Act,” said a person familiar with the development. “A stake of 25 per cent gives the holder immense power under the Companies Act. Domestic institutions will be more comfortable acquiring a stake in exchanges if there is a possibility of taking it up to 25 per cent,” he explains.
Last year in August, the Bombay Stock Exchange (BSE) acquired 15 per cent in the United Stock Exchange. BSE also holds a five per cent stake in the Calcutta Stock Exchange. Similarly, the Financial Technologies Group owns five per cent in the Delhi Stock Exchange.
Other issues
The Jalan committee, formed in February, has sought views from market participants on a host of issues, including the model of ownership for stock exchanges and depositories. “The consultation process of market players and financial market intermediaries will be vital. It has been done on wide-ranging issues, as there is no specific or unique model or one view that we have followed. All views have been taken into account so that the outcome is constructive,” said a key committee member.
It asked participants whether diversified ownership (as in the case of stock exchanges) or an anchor/strategic investor approach (as in the case of depositories) is a better model. The committee has also sought views on classes of entities that can be permitted to be anchor investors. And, if there should be lock-ins for anchor investors.
The committee is also looking at whether the current limit for foreign institutional investors in stock exchanges needs to be reviewed. Market participants have also been asked to give views on whether foreign stock exchanges can be permitted to hold up to 15 per cent or more equity in Indian stock exchanges. The committee will also specify shareholding norms in depositories. Recently, BSE raised stake in Central Depository Services Ltd to 51 per cent, while NSE holds a little over 25 percent in National Depository Services Ltd. The exchanges are in a race to provide end-to-end solutions to clients.
Mumbai, August 11, 2010
Domestic institutions can hold up to 15% stake.
Market participants want the regulator to increase the maximum permissible holding for domestic institutions in stock exchanges from the current 15 per cent to 25 per cent.
At present, investors who can buy up to 15 per cent in a stock exchange include domestic banks and financial institutions, clearing corporations, depositories and stock exchanges.
This is one of the important proposals put forward by a section of the industry before the Bimal Jalan committee, set up to review the ownership and governance of market infrastructure institutions. The committee’s report is expected next month.
Industry players feel the current cap of 15 per cent for financial institutions acts as a road block in attracting genuine investors. Incidentally, when the norms were first promulgated, the cap was five per cent. Only later were certain categories of investors, including stock exchanges, allowed to increase their share to 15 per cent.
According to people familiar with the development, the industry suggestion also stems from the fact that the proposed takeover norms stipulate increasing the open offer threshold to 25 per cent from the current 15 per cent.
“Institutions want the committee to align the structure with the proposed takeover norms and also with the Companies Act,” said a person familiar with the development. “A stake of 25 per cent gives the holder immense power under the Companies Act. Domestic institutions will be more comfortable acquiring a stake in exchanges if there is a possibility of taking it up to 25 per cent,” he explains.
Last year in August, the Bombay Stock Exchange (BSE) acquired 15 per cent in the United Stock Exchange. BSE also holds a five per cent stake in the Calcutta Stock Exchange. Similarly, the Financial Technologies Group owns five per cent in the Delhi Stock Exchange.
Other issues
The Jalan committee, formed in February, has sought views from market participants on a host of issues, including the model of ownership for stock exchanges and depositories. “The consultation process of market players and financial market intermediaries will be vital. It has been done on wide-ranging issues, as there is no specific or unique model or one view that we have followed. All views have been taken into account so that the outcome is constructive,” said a key committee member.
It asked participants whether diversified ownership (as in the case of stock exchanges) or an anchor/strategic investor approach (as in the case of depositories) is a better model. The committee has also sought views on classes of entities that can be permitted to be anchor investors. And, if there should be lock-ins for anchor investors.
The committee is also looking at whether the current limit for foreign institutional investors in stock exchanges needs to be reviewed. Market participants have also been asked to give views on whether foreign stock exchanges can be permitted to hold up to 15 per cent or more equity in Indian stock exchanges. The committee will also specify shareholding norms in depositories. Recently, BSE raised stake in Central Depository Services Ltd to 51 per cent, while NSE holds a little over 25 percent in National Depository Services Ltd. The exchanges are in a race to provide end-to-end solutions to clients.
Show me the money!
Ashish Rukhaiyar
Mumbai, August 5, 2010
While earnings growth sounds good, companies with strong cash flows get a high premium on the bourses
It pays to stick to old fundamental ways of investing. At a time when the market is range-bound with highs appearing exceedingly difficult to be sustained, many companies are seeing their share prices register new highs. The common link amongst these companies is that their businesses have been able to generate operating cash flow (OCF).
Investing in a company based on an analysis of its operating cash flow is a preferred option. Many market experts opine that operating cash flow is a better measure of the company’s profits than just the mere earnings reported on the books.
“Cash is king! And the operating cash flow is a very important parameter to judge a company’s performance,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “The market always gives a higher price earnings multiple to companies that have a significant cash flow. If you look at any capital guzzling entity, no matter how the performance is, the price to earnings (PE) multiple would always be lower compared to a company with higher cash flows. Historically, the best PE multiple companies have been those that have a good operating cash flow and impressive earnings,” he explains.
Operating cash flow has been historically looked upon by analysts as an important barometer. In a report released in November last year, Emkay Global Financial Services noted that operating cash flow is one of the important parameters along with return on equity (RoE) and return on capital employed (RoCE).
“Among the 12 important parameters used in the study, positive operating cash flow, high RoE & RoCE dominate. We believe that these are primary factors which caused stocks to touch lifetime highs,” noted Emkay.
In financial accounting terms, operating cash flow refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. In simple words, operating cash flow is the cash that a company generates through running its business.
The benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has traded in a narrow range in the current calendar year, gaining only a little under 500 points or 2.82 per cent. Quite expectedly, there has not been much action in any of the index constituents. However, around 100 off the top 500 companies listed on BSE have registered new highs in the current calendar year. In most such cases, an operating cash flow in excess of Rs 50 crore has been registered in the financial year 2009-10 (FY10).
Take for instance Asian Paints. The shares touched a new high of Rs 2,608.90 on Wednesday. The company boasts of an operating cash flow of around Rs 106 crore. Similarly electrical equipment major Crompton Greaves touched a new high of Rs 296 on July 23. Analysts are upbeat over its operating cash flow of Rs 105.60 crore for FY10.
Among other notable counters that touched a new high in the recent past include, Ashok Leyland, Bajaj Auto, Cadila Healthcare, Hindustan Zinc, ITC, Torrent Power, Sesa Goa, Lupin, EID Parry, Mahindra & Mahindra, NMDC, Sun TV Network, Exide Industries, Crompton Greaves and Infosys Technologies. Infosys, incidentally, reported an operating cash flow of Rs 617.30 for FY10.
However, there is a caveat. The OCF technique might not be a good tool analyse entities within the banking sector. Incidentally, banks typically have high cash flows on their balance sheet.
“For banks, cost of funds, yield on assets, RoA and price to book are the more useful parameters. OCF cannot be used for banks,” says Anish Damania, business head (institutional equities), Emkay Global Financial Services. Operating cash flow is one of the more important parameters for the manufacturing and services sector, he adds.
That notwithstanding there are nearly 20 banking entities that have touched a new high in the current calendar year. Andhra Bank with a cash flow of more than Rs 550 crore touched a new high of Rs 151 on July 21. Similarly, Allahabad Bank, Yes Bank, UCO Bank, State Bank of India and Punjab National Bank are some of the other banking majors that have touched their respective highs in the month of July
Cash, then indeed is king!
Mumbai, August 5, 2010
While earnings growth sounds good, companies with strong cash flows get a high premium on the bourses
It pays to stick to old fundamental ways of investing. At a time when the market is range-bound with highs appearing exceedingly difficult to be sustained, many companies are seeing their share prices register new highs. The common link amongst these companies is that their businesses have been able to generate operating cash flow (OCF).
Investing in a company based on an analysis of its operating cash flow is a preferred option. Many market experts opine that operating cash flow is a better measure of the company’s profits than just the mere earnings reported on the books.
“Cash is king! And the operating cash flow is a very important parameter to judge a company’s performance,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “The market always gives a higher price earnings multiple to companies that have a significant cash flow. If you look at any capital guzzling entity, no matter how the performance is, the price to earnings (PE) multiple would always be lower compared to a company with higher cash flows. Historically, the best PE multiple companies have been those that have a good operating cash flow and impressive earnings,” he explains.
Operating cash flow has been historically looked upon by analysts as an important barometer. In a report released in November last year, Emkay Global Financial Services noted that operating cash flow is one of the important parameters along with return on equity (RoE) and return on capital employed (RoCE).
“Among the 12 important parameters used in the study, positive operating cash flow, high RoE & RoCE dominate. We believe that these are primary factors which caused stocks to touch lifetime highs,” noted Emkay.
In financial accounting terms, operating cash flow refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. In simple words, operating cash flow is the cash that a company generates through running its business.
The benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) has traded in a narrow range in the current calendar year, gaining only a little under 500 points or 2.82 per cent. Quite expectedly, there has not been much action in any of the index constituents. However, around 100 off the top 500 companies listed on BSE have registered new highs in the current calendar year. In most such cases, an operating cash flow in excess of Rs 50 crore has been registered in the financial year 2009-10 (FY10).
Take for instance Asian Paints. The shares touched a new high of Rs 2,608.90 on Wednesday. The company boasts of an operating cash flow of around Rs 106 crore. Similarly electrical equipment major Crompton Greaves touched a new high of Rs 296 on July 23. Analysts are upbeat over its operating cash flow of Rs 105.60 crore for FY10.
Among other notable counters that touched a new high in the recent past include, Ashok Leyland, Bajaj Auto, Cadila Healthcare, Hindustan Zinc, ITC, Torrent Power, Sesa Goa, Lupin, EID Parry, Mahindra & Mahindra, NMDC, Sun TV Network, Exide Industries, Crompton Greaves and Infosys Technologies. Infosys, incidentally, reported an operating cash flow of Rs 617.30 for FY10.
However, there is a caveat. The OCF technique might not be a good tool analyse entities within the banking sector. Incidentally, banks typically have high cash flows on their balance sheet.
“For banks, cost of funds, yield on assets, RoA and price to book are the more useful parameters. OCF cannot be used for banks,” says Anish Damania, business head (institutional equities), Emkay Global Financial Services. Operating cash flow is one of the more important parameters for the manufacturing and services sector, he adds.
That notwithstanding there are nearly 20 banking entities that have touched a new high in the current calendar year. Andhra Bank with a cash flow of more than Rs 550 crore touched a new high of Rs 151 on July 21. Similarly, Allahabad Bank, Yes Bank, UCO Bank, State Bank of India and Punjab National Bank are some of the other banking majors that have touched their respective highs in the month of July
Cash, then indeed is king!
Algo technology vendors bet high on India
Ashish Rukhaiyar
Mumbai, July 29, 2010
Algorithm trading, or ‘algos’, is a recent concept in India, introduced only a couple of years before. Yet, India has already started featuring high on the priority list of global vendors of technology that specialise in algo programming.
Giles Nelson, co-founder of APAMA, the leading platform in this regard, and deputy chief technology officer, Progress Software, expects the share of algo trades to go up exponentially in the next three years. “India is a good growth market and we are starting to see the beginings in India,” he says.
APAMA is a favoured platform for high-frequency trading applications, with 145 leading financial majors in the world among its users.
“Volumes will increase along with the increase in the size of the economy. Within three years, I would imagine up to 50 per cent will be traded algorithmically. It will increase further from there on,” said Nelson.
“APAMA has been successful in Europe, the US, Japan, Australia, Hong Kong and Brazil, which has been a fast-growing market. We now see potential for growth in India and we feel the time is right to invest,” he added. Progress Software, founded in 1981, is a US-based $500-million revenue company.
Algorithmic trading, in layman terms, refers to use of softwares designed to identify and carry out transactions on a real-time basis. An algo program provides its user speed and precision. For instance, an algo could break up a large buy order into smaller chunks and also decide the timing of the execution of each of the smaller lots so that the market price is not disturbed. Algo trading is most commonly used by large institutional investors as they buy large amounts of shares every day.
Progress Software is not the only algo vendor bullish on India. Some leading financial powerhouses, including Goldman Sachs, UBS and Nomura, have created specialised in-house algo development divisions and are looking at India in a big way. “Overall, India continues to be a high-growth and a high-focus market for electronic trading,” said Kim Man Li, head of electronic trading sales for Asia at Goldman Sachs, in a recent interview to Business Standard.
Other features
“The majority of orders are still the more traditional, or plain vanilla, algorithms. That being said, clients have started exploring use of ‘advanced’ features and complex strategies within these algorithms. Onshore broker proprietary trading desks are utilising more advanced ‘statistical arbitrage’ strategies. And, with the advent of co-location in India, we will see more complex strategies, with a bias towards high-frequency trading,” says Kim.
Interestingly, the growing popularity of algos has also led to a rise in its criticism by a section of market players, who feel program trading increases the probability of ‘flash crash’. Algo proponents, however, deny this, saying that technology, if used within the parameters of the existing regulatory framework and with risk management processes in place, can benefit the investing community. “The use of technology is sometimes seen as injurious, but if used in the right way and regulated in the right manner, people can benefit through lower costs, which benefits everybody, including retail investors. It also brings more liquidity to the market,” says Nelson.
In a similar context, Goldman Sachs’ Li feels that given the additional care taken by exchanges and regulators in approving algorithms, “an accentuated move in prices caused by algorithms should not be a common phenomenon”.
Mumbai, July 29, 2010
Algorithm trading, or ‘algos’, is a recent concept in India, introduced only a couple of years before. Yet, India has already started featuring high on the priority list of global vendors of technology that specialise in algo programming.
Giles Nelson, co-founder of APAMA, the leading platform in this regard, and deputy chief technology officer, Progress Software, expects the share of algo trades to go up exponentially in the next three years. “India is a good growth market and we are starting to see the beginings in India,” he says.
APAMA is a favoured platform for high-frequency trading applications, with 145 leading financial majors in the world among its users.
“Volumes will increase along with the increase in the size of the economy. Within three years, I would imagine up to 50 per cent will be traded algorithmically. It will increase further from there on,” said Nelson.
“APAMA has been successful in Europe, the US, Japan, Australia, Hong Kong and Brazil, which has been a fast-growing market. We now see potential for growth in India and we feel the time is right to invest,” he added. Progress Software, founded in 1981, is a US-based $500-million revenue company.
Algorithmic trading, in layman terms, refers to use of softwares designed to identify and carry out transactions on a real-time basis. An algo program provides its user speed and precision. For instance, an algo could break up a large buy order into smaller chunks and also decide the timing of the execution of each of the smaller lots so that the market price is not disturbed. Algo trading is most commonly used by large institutional investors as they buy large amounts of shares every day.
Progress Software is not the only algo vendor bullish on India. Some leading financial powerhouses, including Goldman Sachs, UBS and Nomura, have created specialised in-house algo development divisions and are looking at India in a big way. “Overall, India continues to be a high-growth and a high-focus market for electronic trading,” said Kim Man Li, head of electronic trading sales for Asia at Goldman Sachs, in a recent interview to Business Standard.
Other features
“The majority of orders are still the more traditional, or plain vanilla, algorithms. That being said, clients have started exploring use of ‘advanced’ features and complex strategies within these algorithms. Onshore broker proprietary trading desks are utilising more advanced ‘statistical arbitrage’ strategies. And, with the advent of co-location in India, we will see more complex strategies, with a bias towards high-frequency trading,” says Kim.
Interestingly, the growing popularity of algos has also led to a rise in its criticism by a section of market players, who feel program trading increases the probability of ‘flash crash’. Algo proponents, however, deny this, saying that technology, if used within the parameters of the existing regulatory framework and with risk management processes in place, can benefit the investing community. “The use of technology is sometimes seen as injurious, but if used in the right way and regulated in the right manner, people can benefit through lower costs, which benefits everybody, including retail investors. It also brings more liquidity to the market,” says Nelson.
In a similar context, Goldman Sachs’ Li feels that given the additional care taken by exchanges and regulators in approving algorithms, “an accentuated move in prices caused by algorithms should not be a common phenomenon”.
Solid start for Chicago bourse's Nifty contract
Ashish Rukhaiyar
Mumbai, July 28, 2010
It has been just over a week since the Chicago Mercantile Exchange (CME) introduced trading in two futures contracts based on the National Stock Exchange’s Nifty benchmark. The volume in one of these is already impressive.
E-micro Nifty futures, with a notional value similar to that of the contracts on the Singapore Stock Exchange (SGX), have registered a daily volume of more than 2,000 contracts on a couple of occasions. The combined turnover of the two contracts has been more than Rs 100 crore on most days.
According to people tracking the development, the investor interest in E-micro Nifty contracts can be attributed to the fact that CME contracts can be used to offset positions on SGX. An investor can initiate a position on CME or SGX and offset it at the other exchange.
According to data from Bloomberg, E-micro Nifty contracts, with a current value of approximately $10,900 each, are seeing an average volume of nearly 1,700 contracts since debut on July 19. A spurt in the volume was visible on July 22 when 2,226 were traded. It was followed by 2,807 contracts on July 23. This is approximately 15 per cent of the Nifty volume on SGX. According to CME, the contract size of E-micro Nifty contracts is $2 multiplied by the value of the Nifty on that day.
"The volumes are pretty good in E-micro, as the contract size is the same as that available on the Singapore Stock Exchange. And, there is a mutual offset facility available to brokers who trade on CME and SGX," said an NSE official. Market experts also say investors can use the E-micro Nifty contracts to play the arbitrage game between continents. The contracts enjoy a Mutual Offset System due to an arrangement between CME Group and SGX. "This facility allows traders to take positions in eligible index contracts at one exchange and offset them at the other one — essentially creating one marketplace crossing different time zones,” says a CME release.
Meanwhile, the E-mini Nifty contracts, with a current value of approximately $54,510, have seen a drop in volume in the past couple of trading sessions. On July 23, these registered their highest volume of 163 contracts. On Monday, however, only 78 were traded. The contract size of E-mini contracts is $10 multiplied by the Nifty value on that day. Although E-mini Nifty futures listed on CME are not eligible for mutual offset, they are eligible for a position offset with E-micro Nifty futures.
Both Nifty futures contracts were introduced on CME on July 19 and are traded on the CME Globex platform, which provides access to participants across the globe.
Mumbai, July 28, 2010
It has been just over a week since the Chicago Mercantile Exchange (CME) introduced trading in two futures contracts based on the National Stock Exchange’s Nifty benchmark. The volume in one of these is already impressive.
E-micro Nifty futures, with a notional value similar to that of the contracts on the Singapore Stock Exchange (SGX), have registered a daily volume of more than 2,000 contracts on a couple of occasions. The combined turnover of the two contracts has been more than Rs 100 crore on most days.
According to people tracking the development, the investor interest in E-micro Nifty contracts can be attributed to the fact that CME contracts can be used to offset positions on SGX. An investor can initiate a position on CME or SGX and offset it at the other exchange.
According to data from Bloomberg, E-micro Nifty contracts, with a current value of approximately $10,900 each, are seeing an average volume of nearly 1,700 contracts since debut on July 19. A spurt in the volume was visible on July 22 when 2,226 were traded. It was followed by 2,807 contracts on July 23. This is approximately 15 per cent of the Nifty volume on SGX. According to CME, the contract size of E-micro Nifty contracts is $2 multiplied by the value of the Nifty on that day.
"The volumes are pretty good in E-micro, as the contract size is the same as that available on the Singapore Stock Exchange. And, there is a mutual offset facility available to brokers who trade on CME and SGX," said an NSE official. Market experts also say investors can use the E-micro Nifty contracts to play the arbitrage game between continents. The contracts enjoy a Mutual Offset System due to an arrangement between CME Group and SGX. "This facility allows traders to take positions in eligible index contracts at one exchange and offset them at the other one — essentially creating one marketplace crossing different time zones,” says a CME release.
Meanwhile, the E-mini Nifty contracts, with a current value of approximately $54,510, have seen a drop in volume in the past couple of trading sessions. On July 23, these registered their highest volume of 163 contracts. On Monday, however, only 78 were traded. The contract size of E-mini contracts is $10 multiplied by the Nifty value on that day. Although E-mini Nifty futures listed on CME are not eligible for mutual offset, they are eligible for a position offset with E-micro Nifty futures.
Both Nifty futures contracts were introduced on CME on July 19 and are traded on the CME Globex platform, which provides access to participants across the globe.
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