Electronic trading in India: Funny how these things work

I recently attended TradeTech India, held in Mumbai. In the last couple of years, there has been a lot of excitement about electronic trading. Direct Market Access (DMA) got approved in India in 2008. Smart Order Routing got the go-ahead in 2010. But algo trading in the country really got a shot in the arm when co-location became available in 2010. After this, there were a spate of offerings from all the leading brokerages, global and local, for the buy-side to avail of. In a number of events in 2010 and 2011, including TradeTech, the discussion had centered on how the Indian buy-side had to be converted to the idea of algorithmic and high-frequency trading. Well, that is the case no longer. At the latest event, the message from a number of brokerages was rather different. It is no longer about converting a reluctant buy-side to more algo trading. If anything, the problem is that almost all the leading buy-side firms have been completely converted to the idea. No, the problem now is that they consider algo trading and HFT as a lower cost version of its manual counterpart. Hence, instead of providing higher volumes to get lower prices, they believe that they should get lower prices come what may. The result is that the leading brokerages and vendors are now facing the ironical situation where they have created a market, but are unable to serve it at the expected price-points. However, while this is bad news for some, it can be good news for others. If some firms can become more flexible in their pricing, then there is a whole new market for algo trading technology that is just waiting to be exploited in India. This could be a great opportunity for small firms and start-ups to get their business going and to gather sufficient volumes to be able to exploit the economies of scale. The other side of the coin is that the need for cheaper algo trading might mean that several smaller brokerages and buy-side might decide to develop their own algo trading solutions, as often they already have the financial and technological expertise in-house. All in all, it seems that an important segment of the Indian market is once again coming up with its own innovative solution to a new problem, confounding those who expected it to fall in line with global trends. It is ready to adopt more sophisticated electronic trading, but not necessarily at the same price as some other markets. The challenge for global players is to see whether they can take advantage of cheaper costs locally to create a hybrid product that would serve the requirements of their local clients on an on-going basis, without undermining their own margins and profitability.