Financial markets have changed in many ways thanks to the technological advancements and regulatory changes. Stock markets have evolved quite a bit through the use of communication technologiesNSE -0.44 % and rapid improvement physical infrastructure. The implications of massive high frequency trading are becoming increasingly clear in equity and other financial markets.
Computer-based trading, including algorithmic trading (AT) and high frequency trading (HFT), have become predominant features of modern financial markets.
In recent years, high frequency trading has increased vastly in stock markets of developed countries, and it is now spreading to emerging markets driven by the growth of proprietary trading firms and quantitative hedge fund strategies.
As technology develops, high frequency trading will move beyond equity markets to other asset classes such as futures, options, bonds and foreign exchange.
Actually, banks, brokers, corporates and financial institutions are seen as regular participants to hedge, speculate or arbitrage in the market. Thus, it has become necessary to ensure adequate depth in markets.
In India, the participation in the derivative segment has been picking up pace, helping maintain liquidity and provide enough depth. However, most F&O trading takes place in Nifty and Bank Nifty, which have enough depth to create big positions. In comparison, individual stocks still need to get many participants.
Besides, use of traditional strategies such as Strangle, Straddle and Butterfly Spreads is popular in India and it is picking up with the use of high frequency trading. There was a time when the regulators allowed brokers to offer direct market access to their institutional clients, which actually kickstarted algo-based trading In India with the potential to generate profits at a speed and frequency that’s impossible to match for a human trader.
Undoubtedly, new strategies such as HFT and algo trading can improve the quality of markets, ensure greater liquidity, narrow spreads and increase efficiency. Recent developments in machine learning technologies hold promise in analysing data more rapidly and accurately. The success of HFT and algo trading demonstrated the value of machine learning techniques as they created efficient markets by facilitating price formation, lowering cost of trading and improving linkages among markets.
Undeniably, we are headed towards a phase various advance technologies. Complex strategies, algo trading and HFT, to name a few, have always drawn strict vigil of the regulators for their possible impact on market integrity and stability.
Market regulator Sebi and the stock exchanges have been continuously monitoring the capital markets and coming out with initiatives to encourage investors. And the steps taken by Sebi so far have actually helped increase participation in the Indian markets, pushing it to the next level to attain greater maturity.