Kim Man Li, Goldman Sachs
Last August, a much-awaited development took place with SEBI’s approval of smart order routing (SOR) in India’s equities and futures markets. This would later be supplemented by increased flexibility – the allowance of multiple order types (not just immediate-or-cancels) and SOR from co-located trading engines. Brokers have long been positioning for these clearances and are at different stages of rollout.
India’s market structure has long lent itself to the effective — and what we consider necessary — use of SOR. Though dual-listed equities between the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) only make up about one-third of traded securities, a look at the past three months shows that an overwhelming 96% of the notional traded on these exchanges was in dually-listed names. In these equities, situations abound where better prices, additional liquidity and faster parent-order completion are possible for the trader making use of both venues. On price alone, we have observed an average 8.5bp cross-exchange price discrepancy during trading hours.
But taking advantage of these situations is not always practical. Only the fastest, often India-dedicated traders can efficiently capitalise on these short-term opportunities. For simplicity and efficiency, we usually see most market participants opt to trade their entire order on a single exchange, potentially missing out on better prices, additional liquidity and lower market impact.
Fortunately, with SOR’s recent availability, the difficulties of trading on both exchanges have been automated away, and market participants are beginning to adopt the view that SOR-enabled trading is necessary for the pursuit of best execution in India.
SOR certainly isn’t new in the world of electronic trading — it has been a staple of market participants in the Alternative Trading System (ATS)-heavy US, Europe — and to lesser extent, Asia — for years. The most basic of SORs should connect to multiple venues and intelligently route between them while considering price, liquidity, venue speed, and certainty of execution, among others.
But not all SORs are created equal; nor are existing global SORs always adapted to target markets in the most effective manner. In India, lower barriers to entry have led to heavy retail participation — some 75% of the market — driving break-neck trading speeds and tight spreads. Additionally, the exchanges’ native support for display size gives participants the ability to hide up to 90% of their order, enabling large amounts of hidden liquidity on the order book. Given India’s intricacies, it follows that traders looking for a best-in-class SOR solution in India should ask their brokers how they are addressing these market-specific challenges.
Goldman Sachs Electronic Trading’s (GSET) India SOR accounts for additional factors beyond the basics: hidden liquidity, historical and real- time liquidity mapping, intelligent rebalancing of posted orders, and variable order types. Rebalancing of posted orders is particularly important in India, where liquidity often shifts intraday between exchanges. SORs must also be ready to respond in the event of fading quotes (quick removal of liquidity) and exchange issues.
Like GSET’s SOR in other markets, no change in workflow is required to benefit from the new technology. All algorithmic orders make use of the SOR engine automatically, and a client can opt in or out for SOR on all or a selection of their algorithmic strategies.
As participants gain access to SOR in India, a number of market developments could follow. Cross-listed securities typically executed on a single exchange might see a more equitable split in fills, perhaps leading to increased market efficiency and exchange competition. Looking abroad, this heightened competition has often driven venues to compete on price and innovate through new on-exchange order types, order matching offerings, and more. Brokers similarly will face heightened competition as they are encouraged by their clients to build SORs for India and innovate for the best execution logic. And EMS and OMS vendors will be required to upgrade their technology to handle new post- trade requirements for multi-venue execution and clearing.
India’s electronic trading market is one of the most exciting in Asia, with a lively, synergistic dialogue between buyside, sellside, regulators, and the exchanges. SOR in India is a promising development and one we believe will be beneficial to all market participants.
This material has been prepared by personnel in Goldman Sachs Electronic Trading and is not the product of the Global Investment Research Department or Fixed Income Research. This is not a research report and is not intended as such.
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