Electronic Trading & The Indian Portrait

For many years stock exchanges were physical locations where buyers and sellers met and negotiated. Exchange trading would typically happen on the floor of an exchange, where traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another – a process known as open outcry or pit trading (the exchange floors were often pit-shaped – circular, sloping downwards to the center, so that the traders could see one another). 

With the improvement in communications technology in the late 20th century, the need for a physical location became less important and traders started to transact from remote locations in what became known as electronic trading. Electronic trading made transactions easier to complete, monitor, clear, and settle and this helped spur on its development.

By 2011 investment firms on both the buy side and sell side were increasing their spending on technology for electronic trading. With the result that many floor traders and brokers were removed from the trading process. Traders also increasingly started to rely on algorithms to analyze market conditions and then execute their orders automatically. 

The move to electronic trading compared to floor trading continued to increase with many of the major exchanges around the world moving from floor trading to completely electronic trading. 

Trading in the financial markets can broadly be split into two groups:

• Business-to-business (B2B) trading, often conducted on exchanges, where large investment banks and brokers trade directly with one another, transacting large amounts of securities, and
• Business-to-consumer (B2C) trading, where retail (e.g. individuals buying and selling relatively small amounts of stocks and shares) and institutional clients (e.g. hedge funds, fund managers or insurance companies, trading far larger amounts of securities) buy and sell from brokers or "dealers", who act as middle-men between the clients and the B2B markets

The increase of electronic trading has had some important implications:

• Reduced cost of transactions 
• Greater liquidity 
• Greater competition
• Increased transparency 
• Tighter spreads

The uneven pace of financial sector liberalization in India has been a bone of contention for some time. There have been similar disagreements about the manner in which electronic trading has been regulated. Foreign firms have entered India expecting it to be like other developing markets, but have found it much more difficult to compete effectively, facing hurdles in rolling out their services.

In a new report, the growth of electronic trading in Indian exchange-based markets, including equity, foreign exchange, and commodities. The Indian capital markets have gone through a gradual pace of liberalization. Over the last decade, steps have been put in place to allow technologies such as algorithmic trading, direct market access (DMA), and smart order routing (SOR). The country’s financial markets are poised to become international centers for electronic trading.

India's debt markets have experienced rapid growth and along with that electronic trading also risen sharply, with the market growing at a CAGR over 75% since 2005.

Technological change has increased the connectivity of participants, bringing down search costs. A new form of “hot potato” trading has emerged where dealers no longer play an exclusive role. That’s progression out there for you!