High Frequency Trading In India: The term High Frequency Trading is a form of trading that has caught everyone’s imagination. Although there is no set definition for High Frequency Trading. But in general, it revolves around the concept of Speed, algorithms, quick profits, use of statistics, etc. So using all these concepts, it can be defined as:

“High Frequency Trading can be explained as Latency sensitive strategies with high-speed networks. It uses technology to place orders and execute trades in a fraction of a second. Inefficiencies in the market are explored using High Frequency Trading”

The World of High frequency trading entirely revolves around the practical understanding of the news, events, the fundamental and Technical picture around that time, and to be the ability to execute trades at a quick speed and benefit from it.

So, analysis, interpretation, and speed are the essences of HFTs. And all these are possible with the use of the best available technology. So, HFT in short is the use of Technology and trading expertise to generate multiple trade opportunities with high accuracy. 

How does HFT Work?

The game of HFT is dependent on one’s ability to react to the situation as fast as possible. The objective is to take quick profits and multiple trades on a continuous and regular basis. The key here is to analyze the incoming market information and data as soon as possible.

In the times that went by, there used to be a huge gap between the price that buyers wanted to pay and the price sellers asked for. But with the advent of HFT trading, this gap has reduced considerably because the main objective of this form of trading, is to take small tick-by-tick profits and in a large volume of transactions. 

“A Tick is the smallest change in the price of the underlying asset. For, example, if the price of crude oil moves from $100 to $100.02, then the tick movement here would be 2 units.”

Various order Types of High Frequency Trading in India

As has been discussed thus far that High Frequency trading revolves around taking multiple trades and also with higher accuracy. There are various types of orders that are used while executing HFT orders. Let us try and understand:

Market Order

These are those order types that are executed at the best bid and offer. If we are looking to buy, then the best bid is hit, and if we are looking to sell, then the best offer is hit. 

Limit Order

These are those order types, that are executed at the selected price and not at the existing price. Say, if we want to buy 500 shares of XYZ company at Rs. 95 and the current price is Rs. 96.50, then under limit order type, the order is placed at Rs. 95. Once the spot price comes to Rs. 95, then the order gets executed. Or these orders can also be processed via Brokers.

Trade With Market Makers

Here the aim is to trade with Market makers. The orders are placed at the best bid and best offers and one tries to take a quick scalping trade. 

Iceberg Orders

This is another order type that is being used while executing big-size orders. Say, if a product trades on low volume at each price and if you are looking to buy large quantities at a particular price, then an Iceberg order is the way to go. Let us illustrate: Say, you have a requirement to buy 1000 shares of XYZ company at existing big.

So, you could flash 200 shares at one go and once those 200 get filled, then the next lot of 200 can be flashed and so on till we get 1000 shares. The main advantage of this order type is that the large order gets filled and you don’t have to worry about chasing the market because of the large size order.

Also Read: How to Learn Technical Analysis? Training Wheels For Trading!

Facts About High Frequency Trading in India

Although as exciting as it may sound, High Frequency trading in India needs to be understood keeping in mind the following facts:

Latency of Information

Latency of information can be the most hindering factor while executing trades. Latency is the time taken for the date to travel to its desired destination. This time should be reduced to a minimum for perfect execution of HFT trades. 

Decision Making

This again is very important while executing trades. Even after one receives the data at a very fast speed, one needs to be able to analyze and interpret the data at a quick pace to make an informed trade decision.

Asset Types

HFT trades can be executed in various asset classes like Stocks, Futures, Options, FOREX, Bonds, etc.

Price Action

This is one important facet that often gets ignored. The price action here implies the movement of prices and the action that takes place around. Price action analysis itself provides many trading Opportunities that can be used by the traders. 

What Are Automated High Frequency Trades in India?

Automated HFT trades try to take advantage of arbitrage trade opportunities between two similar or related products. It could be as simple as the price difference in prices between the same product trading at two different exchanges. 

HFT firms design algos to take advantage of price differences. Some of these Algos are also deployed with a fixed risk-to-reward ratio and they take advantage of this till the stop loss gets triggered and are again re-deployed in the market with reset specifications. 

Market Participants in High Frequency Trading in India

High Frequency Trading participants belong to the following categories in India

Proprietary Firms

These are those companies that use their own money and have multiple traders working for them and have their own in-house research and execution team. They do not have any clients or customers.

Brokers and Dealers

These are those brokers and dealers that have a separate desk for HFT trading and this has nothing to do with their regular client business.

Hedge Funds

These are those players who have big-ticket sizes and they take advantage of trading opportunities that come in their particular asset class.

Advantages of High Frequency Trading in India

With the advent of Technology, High Frequency Trading has been able to benefit massively. What was a distant dream once upon a time has become a basic feature in the current scenario.

  • Market liquidity and market depth can be easily seen and that can be used to make an informed trade decision.
  • Because the number of trades is high, HFTs have the bargaining power of getting the Transaction cost of implementation.
  • Because of the presence of HFTs, the overall difference between the bid and ask has reduced and that has made the market more efficient. 
  • The market traditionally has been always more favorable to those who have more knowledge, but with the introduction of HFT and their speed of exhaustion, the balance seems to have been restored.

Disadvantages of High Frequency Trading in India

Every technology that has the power of disruption comes with its own set of challenges. And same applies to High Frequency Trading. Following are some of the disadvantages:

  • Malfunctioning of the algos and the software in a few instances have potentially wiped off billions of dollars from the market.
  • And because of the high speed of execution, there are higher chances of possible market speculation like order spoofing
  • A lot of Market pundits are of the view that HFTs are only for short-term gain and generally do not work for the long-term growth of the market. 

Role of SEBI in relation to High Frequency Trading in India

The main reason for which SEBI was established was to act as a regulatory authority. Under Sec 11(e) of SEBI Act, 1992, its main function is to prohibit unfair and fraudulent trade practices. In June 2020 SEBI introduced guidelines to regulate the functioning of HFT in India. Following were some of the specifications:

  • To hold back algos from placing large orders and pulling them back within a very short span of time. This is done to prevent the other players from being misled.

    Some of these algos sometimes want to buy some shares of the particular company and to get fills, they place large quantities of orders on the sell side. And it creates a false sense of supply in the Market. So, to prevent this, SEBI introduced these rules
  • One of the major advantages of HFT is Co-location whereby the algos are in close proximity and the information travels fast because of nearness. But this facility comes at a cost and that makes it not a level playing field because only a handful can afford such a facility.

    To prevent such activity, SEBI has made a rule whereby the orders would be first received and then all the accumulated orders within that batch would be matched.
  • SEBI has also introduced the Order to Trade Ratio (OTR). It simply refers that once an order is placed, a certain quantity needs to be filled from the total before it should be pulled and be called a non-spoofing order.

    If the OTR criteria are not matched then those specific traders breaking the rules should be penalized. 

In Closing

The rise of High Frequency Trading in India has brought a lot of excitement and has taken care of any inefficiencies that exist in the system. But SEBI needs to be the main watchdog of the whole affairs of HFT as there is always a chance of either algoid misfiring or fraudulent activities taking place. All in all, there are exciting times coming ahead for High Frequency Trading in India. 

Happy Trading and Money Making !!

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