The Trend That Was
The period around 1980s and 1990s saw computerisation of stock trading and revolutionized the market. The computerized trading platforms routed automatically to target exchanges the trades that were generated from trading terminals by the users. The trading terminals were sophisticated to provide live market trend on the screen for the user to monitor and take intelligent decision on entering or exiting the market. By end of the decade of 1990s, the market was saturated and the trading was primarily computerized to the extent that the trades generated from trading terminals are passed through a on-premise central system of risk management and then route the trade to the exchange. The provision of risk definition and management was revolutionary and that provided certain amount of security against taking un-intended huge exposures in the market and avoiding the risk.
Current Trend
The past decade has seen considerable progress on the technology assisting the trading. The Algorithmic Trading has become the buzz word. Since 2005, the institutional trading has become more competitive and the traders have been using algorithms and computerized solutions for decision making. According to Boston-based financial services industry research and consulting firm Aite Group, a third of all EU and US stock trades in 2006 were driven by automatic programs, or algorithms. As of 2009, HFT firms account for 73% of all US equity trading volume.
In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders. American markets and European markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets also have active algo trading (about 25% of orders in 2006). Futures and options markets are considered to be fairly easily integrated into algorithmic trading, with about 20% of options volume expected to be computer generated by 2010. Bond markets are moving toward more access to algorithmic traders.
One of the main issues regarding HFT is the difficulty in determining just how profitable it is. A report released in August 2009 by the TABB Group, a financial services industry research firm, estimated that the 300 securities firms and hedge funds that specialize in this type of trading took in roughly US$21 billion in profits in 2008.
While the US and European markets have allowed and adopted Algorithmic Trading solutions, the penetration of this concept has been quite slow in the Indian market. Primary reasons behind this are two:
· Lack of awareness and skepticism of the automated trading
· High cost of the Algorithmic Trading platforms and Risk Management solutions