I hate to say “I told you so!” but this is exactly what happened. In April of this year, I had written an article for Moneylife on High Frequency Trading (HFT) and how it could impact India. I wrote this article because I have been trading in the Indian Futures market and could not decipher the wild swings that were taking place in the market in the months of Nov 2014 to Jan 2015. Many day traders lost their shirts and could not fathom how the fluctuations were blowing past Stop loss limits. As Sherlock Holmes would have said:
“When you have eliminated the impossible, whatever remains, no matter how improbable, must be the truth.”
– The Sign of Four
Therein lies the genesis of my idea for the article on HFT. During my last trip to India, I spoke with several experts in the Indian trading markets and by and large, they agreed with my hypothesis that those who were co-located in the NSE building of Bandra-Kurla complex were enjoying certain advantages that others were not.
Fast forward to the present and I see that Sucheta Dalal, the editor of Moneylife has come out with a story on this and how it has been brewing for several months. This is a serious matter as it will dent India’s reputation for a fair and transparent Stock market.
It behooves the Finance Ministry, under whose ambit the Stock Market comes to act quickly and efficiently and put systems in place to address this quickly. I am reproducing my recommendation below, from my Moneylife article:
My suggestion is to create an exchange designed along the lines of IEX. IEX opened for business in 2013 and now does about 1% of all US stock transactions. They offer only 3 types of trade – Market, Limit and mid-point. IEX does not allow co-location nor does it offer any speed benefits for HFTs and therefore levels the playing field. Some of the investors in IEF are Bain Capital Ventures, Belfer Management, Brandes Investment Partners, Capital Group, Cleveland Capital Management, Franklin Resources, Inc., Greenlight Capital, MassMutual Ventures, Maverick Capital, Pershing Square, Scoggin Capital Management, Senator Investment Group, Spark Capital, TDF Ventures, and Third Point Partners. Goldman Sachs announced its support to IEX and even sent some business its way for a few days (Dec 18-19, 2013) before they changed their mind and went back to their (good or bad) ways.
And one more thing – the new exchange (let us call it FAIR – Fair and Intelligent Retail platform) should be located geographically in the middle of the country so as to be equidistant (more or less) to all cities… Did I hear someone say Nagpur?
Final Note: If this subject seems complicated, I encourage readers to click on the URLs which have a lot of information. This video stopped trading at US markets as it was playing out!
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