In a significant step that will usher in algorithmic trading and thereby transform the Indian stock markets, the Securities and Exchange Board of India (Sebi) has recently allowed direct market access to institutional investors. This would enable institutions to directly place their buy and sell orders without any manual intervention by their brokers.

In US, Algorithmic Trading (AT)/Direct Market Access (DMA) accounts for around 25-30% of the daily stock market turnover. And in major European markets, roughly 15-20% of the trading volume can be attributed to DMA. In the New York Stock Exchange (NYSE), the largest stock exchange in the world by dollar volume, around four-fifth of the turnover comes from AT. And in case of Chicago Board Options Exchange (CBOE), one of the world's largest options exchanges, the proportion of the trading business accounted for by AT is even higher. But India, which boasts of a highly sophisticated and computer-savvy stock market, the actual trading process has not yet been automated. It is only in the last year that the report of the high powered expert committee on Making Mumbai an International Financial Center (MIFC) had recommended that the Indian markets should embrace AT and DMA by end-2007. The high-level committee had also emphasized that India might be losing half or more of potential order flow because of the prevailing regulatory barriers, whereas a majority of orders and trades in developed markets are generated from automated sources.

Realizing the importance of AT, the capital market regulator Sebi, under the Chairmanship of CB Bhave, has taken a bold step and asked the exchanges to gear up to direct market access for institutional investors. The new system would enable Foreign Institutional Investors (FIIs) as well as the domestic institutions, such as mutual fund houses and insurance companies, to directly perform their buy and sell orders without any manual intervention by their brokers. Under the new system, an institutional investor can place their orders directly through the trading terminal installed in their offices by their brokers. In the extant system, all orders in a stock exchange's trading system have to be channelized through the trading terminals of brokers. However, in the new arrangement, the brokers would require to have technology and systems in place to support DMA and should have the prior approval from the stock exchanges.

The Analyst Magazine, Direct Market Access, Indian Stock Markets, Securities and Exchange Board of India, SEBI, Algorithmic Trading, Foreign Institutional Investors, FIIs, Stock Exchange's Trading System, Asset Management, Mutual Funds, Market Strategies.