TABLE OF CONTENTS Chapter No. Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 4.1 Chapter 4.2 Chapter 4.

er 4.3 Chapter 5 Chapter 5.1 Chapter 5.2 Chapter 5.3 Chapter 6 Chapter 6.1 Chapter 7 Chapter 8 Title
Certificate of Training Supervisor Certificate Certificate of Originality Acknowledgement Executive Summary Objective of the Research undertaken Introduction Literature Review Company Profile Company History Company Products Competitors and its Products Research Methodology Research Design Data Collection Sampling Techniques & Sample Size Results & Discussion Future of Algorithmic Trading Findings Conclusion and Recommendation Limitations of the Study References & Bibliography Annexure

Page No.
(ii) (iii) (iv) (v) (vi) 3 4 15 26 26 29 34 47 47 48 49 50 56 57 60 61 62 63

LIST OF TABLES:Table No.

7.1

Table Title
Different options in Butterfly Strategy

Page No.
59

LIST OF EXHIBITS:Table No.

1.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7

Table Title
Algorithm Trading Process Flow Proportion of Brokers using Algorithmic and Arbitrage Trading. Market Share of Different Software Companies. Estimated Algorithmic Trading Adoption Participation algorithms in use Shares Traded, by Execution Type Major European Venues: Total Equities Volumes, January-June 2011 Levels of Algorithmic Trading in Asias Leading Markets

Page No.
6 50 51 52 52 54 55 56

CHAPTER 1
OBJECTIVE OF THE RESEARCH UNDERTAKEN
The following are the objectives of the research:1) 2) 3) 4) 5) To know the potential market of Arbitrage & Algorithmic Trading in Delhi/NCR. To find out the how many brokers are doing Arbitrage & Algorithmic Trading. To find out how many companies providing the Algorithmic softwares. To find out the desired and existing features of Algorithmic Software. To find out the future of Arbitrage & Algorithmic Trading in stock market.

CHAPTER 2
INTRODUCTION
Algorithmic trading was designed to increase the capacity of the number of trades handled by a stock broker. This was to enable the broker to keep up with the number of orders clients were sending. In addition, algorithmic trading provides a more standard platform on return than a human doing the same job; this consistency reduces the risk of the broker making a loss on buying or selling the shares. Finally algorithmic trading allows large orders to be traded more evenly over the trading day, minimising moving the market and being able to achieve a better price. Algorithmic trading engines are similar to complex event processors; they take information in about market conditions normally in the form of market data. They monitor this information and when certain criteria are met they form a child order, which is a fraction of its parent order which is then sent to market to trade. The attributes of the child order are dependent on the parent order and the algorithm that is trading it, obviously the quantity of the child order must be less than the parent order, but other attributes such as price or order type may differ. There are algorithms that decide which stocks to buy and sell based on mathematical analysis of market conditions, commonly known as High Frequency Trading (HFT) or Statistical Arbitrage trading methods. These methods are out of scope of this project however and we will only be concerned with parent orders being received from clients. Orders being algorithmically traded are normally traded over a longer period of time, but within the trading day. Some algorithms will wait a set amount of time to trade, where others will wait for the price of the shares to become more attractive. More intelligent algorithms may be allowed some edibility on how they decide this, allowing them to run faster in favourable market conditions and slower when the market is against them. Further intelligence can be added by increased processing of market data and attempting to predict how the market is going to move by the current activity. Having good trading algorithms is just as important as having competitive fees when trying to attract clients. Good algorithms may be able to achieve a better price on trades by a client and even with slightly higher brokerage fees the overall cost may be less than using another competitor. It is also for this reason that many of the complex algorithms used by brokers are very closely guarded secrets. Algorithmic trading engines are often very flexible and offer the ability to quickly develop and deploy new algorithms. This is because an idea for a new algorithm may only be suited to be used for a couple of hours, but might return a sizeable profit and the ability to create the algorithm quickly is the deciding factor of whether it will be possible to make use of those market conditions. Also very large clients may request a special algorithm or feature to be added to an existing algorithm for their use only, as these very large clients may provide a large amount of revenue for the broker, being able to accommodate these requests is very desirable. Why algorithmic trading? I choose algorithmic trading specifically because although still as undocumented as many similar problems within the electronic trading ow, it has some simpler concepts which with some background can be understood by the reader. It also forms a good base for further work as more complex scenarios and applications that rely on heavier use of business principles also utilise underlying order management and algorithmic trading solutions.

Algorithmic trading can also be looked under the guise of being a complex event processor (CEP), this area has had significantly more research published. Although this research is concerned with processing different information, many of the principles can be transferred in to this problem space, aiding the project. Isn't algorithmic trading evil? Of course many of you may question doing research into these kinds of activities given the current economic climate. The world has just been through its worst recession in more than 70 years and the blame has mainly been placed at the feet of the worlds investment banks. The recession even saw the bankruptcy of one of the worlds largest and successful investment banks, Lehman Brothers. Although the recession had a number of factors, it does not seem that algorithmic trading contributed in anyway, however this doesn't exonerate it from bad press. More recently, on the 6th May 2010 the Dow Jones Industrial average fell by near 10% in the matter of minutes before rebounding to being only 3-4% down. This was one of the biggest and fastest crashes seen in the history of the equity markets and even though the market recovered somewhat is still extremely worrying. The blame for this crash has been aimed at algorithmic trading, in particular high frequency trading. Some estimates now place algorithmic or high frequency trading as being nearly 66% of all market volume and increasing daily. At the end of the article, the speed of growth in these areas is state for emerging markets. Emerging markets are those that are just beginning to see more activity and attentions and the four biggest are noted under the BRICs umbrella (Brazil, Russia, India and China). Currently algorithmic trading on the Indian stock exchanges is less than 5%, but growth is expected to be 30% to 40% in 4 to 5 years. This shows the importance of these technologies and this research, as well as amplifying the problem of handling increased work load. Many people automatically brand something as evil if they don't understand it. I am not trying to say that algorithmic trading is completely safe and should be unregulated. However with any new technologies there are teething problems and given the environment of this work, much more work is carried out on validation then many other computing projects. It is also a necessity for systems like this to exist, as without investment banks and equity markets, then the companies that we know and love wouldn't be able to exist, producing the products that we enjoy. In todays hyper-competitive and cost-conscious trading environment, fund managers and buy-side traders have turned to computerized algorithms provided by brokers. Algorithms have become a must-have for brokers seeking to gain new business and retain their current clientele. Trade carried out using algorithms is known as algorithmic trading. Algorithmic trading can be defined as placing a buy or sell order of a defined quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm. The rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on the price of the financial instrument. Algorithmic trading is a way to codify a traders execution strategy. Algorithmic trading or computer-directed trading cuts down transaction costs and allows fund managers to take control of their own trading processes. What does algorithmic trading mean to the buy-side and sell-side firms? And how will it impact the technology spend? Is it really as important as the buzz suggests, or is it just another trend that is being hyped up so much that everyone feels they have to ride the wave? Aite Group, a Boston-based consultancy firm, expects traditional buy-side firms to account for 30 percent of all

algorithmic trading by 2008nearly double the current figure. With this kind of projected growth, even the sell-side institutions are pushing for market share with a glut of product offerings. Buy-side firms are gravitating toward rules-based systems. For example, instead of placing 1,00,000-share order, an algorithmic trading strategy may push 1,000 shares out every 30 seconds and incrementally feed small amounts into the market over the course of several hours or the entire day. By breaking their large orders into smaller chunks, buy-side institutions are able to disguise their orders and participate in a stocks trading volume across an entire day or for a few hours. The time frame depends on the traders objective, how aggressive they want to be, and constraints such as size, price, and order type, liquidity and volatility of the stock and industry group. More sophisticated algorithms allow buy-side firms to fine-tune the trading parameters in terms of start time, end time, and aggressiveness. Algorithmic trading is appealing to buy-side firms because they can measure their trading results against industry-standard benchmarks such as volume weighted average price (VWAP) or the S&P 500 and Russell 3000 indices. Algorithmic trading volumes are currently driven by sell-side proprietary traders and quantitative hedge funds. In their never-ending quest to please their customers, being the first to innovate can give a broker a significant advantage over the competition, both in capturing the order flow of early adopters and building a reputation as a thought leader. It is possible to create an algorithm and enjoy a significant time window ahead of the competition if that algorithm addresses a really unique execution strategy.

Exhibit 1.1- Algorithm Trading Process Flow

Developing Algorithms
Popular Algorithms
In practice the most commonly used algorithms in the market place are: arrival price, time weighted average price (TWAP), volume weighted average price (VWAP), market-on-close (MOC), and implementation shortfall (the difference between the share-weighted average execution price and the mid-quote at the point of first entry for market or discretionary orders). Arrival price is the midpoint of the bid-offer spread at order-receipt time, and it also notes the speed of the execution. VWAP is calculated by adding the dollars traded for every transaction in terms of price and multiplying that by shares traded, and then dividing that by the total shares traded for the day. MOC measures the last price obtained by a trader at the end of the day against the last price reported by the exchange. Implementation shortfall is a model that weighs the urgency of executing a trade against the risk of moving the stock. Most algorithms already allow customers to change the timing of executions, the rate of order-filling attempts at the beginning or end of the trading day, and the tolerance for the slippage of a stock from certain benchmarks.

Algorithms Development Process

Development of algorithms involves a high level of collaboration with the client as algorithms are meant to meet the trading strategy objectives of the trader. Algorithms are meaningless if the strategies dont perform. The basic processes involved are: closely interacting with the users to understand their strategies, creating an algorithm based on the inputs, presenting the client with results of back tests and analysis using historical tick-level data. The algorithm is then released to one or two beta clients, who begin to use it on small volumes of live trades. From that point the vendor and the client will engage in a period of iterative feedbacks during which they conduct post-trade analysis to ensure that the desired results are being achieved. The final product is moved up and down the development chain with constant feedback from the end user. Once the required results are obtained the product is finalized. The basic fact to remember is that the client is just interested in results and they demand good performance, speed of execution. So the manner in which an algorithm is tested or the manner in which it is implemented is rarely of concern to the trader.

Algorithmic Components in Trade Cycle

Algorithms are used extensively in various stages of the trade cycle. Broadly we can classify them into pre-trade analytics, execution stage, and post-trade analytics. Pre-trade analytics involve thorough analysis of historical data and current price and volume data to help clients determine where to send orders and when; whether to use algorithms or trade an order manually. The pre-trade analysis is designed to help buy-side traders understand and minimize market impact by choosing the level of aggressiveness and a time horizon for trading various stocks. Traders can select varying levels of aggressiveness and visualize them against the time horizon for completing the trade. Most compare the spread between bid and ask prices, reference that against the volatility of a given stock, and attempt to create a range of potential outcomes. A lot of the broker-sponsored algorithmic trading systems attempt to measure or project the trade costs.

In the Execution stage, traders can create the lists of stocks, choose a particular strategysuch as implementation shortfalland enter the start time and the end time. Traders can also monitor the performance and progress of the algorithms in real time and change the parameters if the stock is moving away. Additionally, users can filter portfolios by sector, market cap, exchange, basket, and percent of volume, profit and loss per share. Several brokers are designing algorithms that sweep crossing networks and so-called dark books liquidity pools that match buy and sell orders without publishing a quote. Post-trade analytics track commissions and assist in uncovering the costs involved from the time a trade is initiated all the way through to execution. Post-trade analytics are meant to improve execution quality and facilitate the making of investment decisions. The most prevalent trading benchmark in use today is VWAP, which is popular because it is easy to measure. Although it provides comparative results, it is not as useful for evaluating strategies that are trying to do something other than follow the market midpoint.

Industry Issues
Where the Industry Is Now
The industry is in the middle of an adoption phase. It is estimated that around 40 percent of the trades made on the London Stock Exchange (LSE) now originate from algorithmic trading systems. About 15 percent to 20 percent of buy-side firms have adopted algorithmic trading broadly, and they are using it within the confines of their Order Management System (OMS) workflow. It is also clear that algorithms are more cost-effective for low-maintenance trades and that has meant head-count shifts and reductions on sales desks. Algorithms have become such a common feature in the trading landscape that it simply is unthinkable for any broker not to offer them because that is what clients want. No broker can be taken seriously today unless it offers at least the basic algorithmsVWAP, TWAP, implementation shortfall, and arrival price. It will cost a broker at least $5 million to $10 million a year to build and maintain algorithms, hire quantitative analysts or financial engineers, and build the required market-data infrastructure. Anyone who wants to offer a comprehensive brokerage solution has to offer algorithms at some point, contends Harrell Smith, director of the securities and investments practice at Celent. It is difficult to confirm categorically whether or not the investment for developing algorithms justified the cost savings. Another bigger question is what the opportunity cost is of not getting more business, of maintaining future and current market share in a slim-margin and fairly commoditized business. What seems clear is algorithms are firmly a part of the brokerage business. It is a perception issueif you are a bulge bracket full-service broker, you cannot just offer VWAP and TWAP; you must have different sophisticated algorithms that are all being constantly refined.

Whos Leading the Charge?

8

According to The Tabb Group, Credit Suisse, Goldman Sachs, Morgan Stanley, and Investment Technology Group are the pioneers in the field. They have captured the most desktop real estate and clients. Other firms that are aggressively pushing their solutions include Citigroup, Lehman Brothers, BNY Brokerage, JPMorgan Chase, Merrill Lynch, and Nomura Securities. Other sources include buy-side quantitative analysts that create their own algorithms and third-party vendors like FlexTrade Systems, Progress Software and Portware, which offer canned algorithms and tools to develop customized algorithms.

To Build or Not to Build

Most buy-side firms get their analytics from brokers as part of an overall service package. However, there is a perception that sell-side brokers offer biased analysis that favors their own algorithms. Moreover buy-side managers are concerned with disclosing too much information about their proprietary trading strategies. As a result, buy-side firms often choose to use thirdparty vendors or build pre-trade and post-trade algorithms in-house. To limit disclosure of their trading strategies when using pre-trade tools provided by brokers, some buy-side firms run the software in-house rather than send guarded data to the brokers. So more technologically savvy resourceful buy-side firms conduct their own analysis, which requires closely integrated research, trade histories from its in-house OMS and trading team and substantial amounts of real-time data. There are valuable vendor solutions but their solutions are limited by the information that brokers and the buy-side are willing to share. In spite of the reservations regarding the algorithms supplied by the sell-side brokers, large number of buy-side managers still look to sell-side for supply of an array of algorithms as part of an overall service package. Some of the bias issues and concerns of buy-side are addressed by agency brokers. Firms that run on a strict agency basis-such as Instinet, EdgeTrade, NYFIX, and ITG-believe that one of the main attractions of their businesses is that their nonproprietary stance means algorithms serve the customer alone. But, there is a lot of confusion on the buy-side as to which brokers algorithm is best to use for a particular stock or strategy. Ultimately to build or not to build depends upon, whether we are writing algorithms just because somebody thinks it is neat or whether we are solving clients problems.

Integration Issues
A lack of technological integration with buy-side OMSs has restrained the use of pre-trade analytics. Although broker-sponsored trading systems have algorithms and analytics built in, very few vendor and in-house OMSs support the real-time tick data that allows for informed, on-thespot decisions. This is because most of the OMSs were built at the time when algorithms were not in existence. But that is beginning to change. Another issue is many of the top US mutual funds run proprietary OMSs that would require a broker-dealer to make individual configurations for each client. Integrating homegrown algorithms with proprietary systems, the implementation of algorithms into the front-end system is a resource-intensive process. In dynamic trading environment, time to market is of utmost important. This necessitates that the algorithm be integrated into an OMS or Execution Management System (EMS). Facilitating this process requires strong relationships with the vendors of these systems and a homogenization of the technical parameters of algorithmic offerings. One step toward addressing these issues would be to standardize delivery of pre-trade and post-trade analytics on the Financial Information exchange (FIX) protocol. By doing so, buy-side traders will be provided the ability to consolidate the analytical data and tools from all of their brokers into a single platform tied directly to their 9

execution and order management technology. This will not only allow traders to easily contrast, compare, and determine which algorithms and strategies to apply to each trade, but will also enable them
to execute directly on that information.

Algorithmic Trading Trends

Algorithms have sparked a fundamental change in everythingan exciting era of opportunity for those who innovate. It is difficult to foresee precisely all the contours of algorithmic landscape. But some broad trends are referred to here. In the coming years, the evolution of the algorithmic landscape will result in firms re-evaluating and evolving their views, trading strategy, asset-class mix, the relationship between buy-side and sell-side, the very composition and skills of the people they employ and information technology.

Customized Algorithms
The buy-side until now predominantly access algorithms pre-built by sell-side brokers. Buy-side players are gradually moving away from commoditized algorithms in order to capture their own intellectual property in customized algorithms.

Algorithms Migrating to Currencies

The use of algorithms in multiple asset classes will continue to increase. There are strong indications to date that algorithms also have a place in the $2 trillion-plus global foreign exchange market, at a time when investors are incorporating foreign exchange (FX) into multi-asset-class strategies. Market participants have long recognized that established equity trading techniques such as baskets and order slicing apply to FX. They are quickly finding out that in the fast-moving FX markets, algorithmic trading is even more effective. It is a fact that algorithms in FX markets are still at an early stage relative to the equities markets.

Fixed Income Next

The introduction of algorithmic trading is being explored in the fixed-income market. It is happening slower than in foreign exchange. The reason for the slow uptake is due to a different market structure in terms of how it functions and operates and algorithmic trading takes off fastest where there is an order-driven environment and greater price transparency. Once European markets embrace the Markets in Financial Instruments Directive (MiFID) algorithmic trading across fixed-income markets gets a boost to take off. MiFID promises to be catalyst, by encouraging a move away from dealer-led markets to central order-driven pools of liquidity.

Algorithms Connect Dark Pools Creating More Liquidity

Technically, any off-exchange marketplace that executes shares anonymously (without quoting) could be considered dark in that it provides limited opportunity for information leakage. According to TABB Group, crossing networks handle five percent to eight percent of buy-side flow. Some of the broker-dealer dark books include Goldman Sachs Sigma X, Credit Suisses CrossFinder, and UBS Price Improvement Network (PIN), while crossing networks include ITGs Posit, LiquidNet, Instinet Crossing, NYFIX Millennium and Pipeline. Algorithms are used extensively by broker-dealers to match buy and sell orders without publishing quotes. By controlling information leakage and taking both the bid and offer sides of a trade, broker 10

algorithms are in a way enabling improved liquidity, pricing on shares for client, and higher commissions to brokers. Cross-Asset Trading Adoption of Algorithmic Techniques Traders are quick to find out cross-asset trading opportunities to generate Alpha (risk-adjusted excess return on an investment).Technology has enabled the traders to monitor and respond to multiple liquidity pools across various asset classes. A trader may, for example, buy equity, hedge with a derivative of the equity, and take out an FX positionall within the same strategy. We will see an uptake in innovative algorithms to capitalize on high frequency cross-asset opportunities. The sophistication of these new combinations requires detailed simulation and careful testing. Modern algorithmic trading platforms provide the tools to back-test, profile, and tune new strategies before deployment.

Algorithms for News Analysis

Markets are moved by news. Buy-side firms and traders are increasingly interested in strategies that are able to analyze news events and its impact on a firm or industry. If the algorithm can analyze and react to the news faster before a human trader; advantages can be realized. An algorithm could, for example alert a trader if a news is released on a company X and if the company stock rises or falls by say one percent in the value of that stock within five minutes. For example, Reuters News Scope Real-time product lets clients use live news content to drive automated trading and respond to market-moving events as they occur. Each news item is meta tagged electronically to identify sectors, individual companies, stories or specific items of data to assist automated trading. Algorithms for Managing Trading Risk and to Meet Regulatory Requirements Given the criticality of risk management there is an increasing demand for algorithms that monitor and respond to risk conditions on real-time basis. Using real-time analytics, algorithms can continuously re-calculate metrics like Value-at-Risk (VaR) and automatically hedge a position if VaR is exceeded. Compliance with law is of utmost importance and it is becoming burdensome with ever increasing stringent regulations. Firms going forward will increasingly harness the latest in algorithmic trading technology to address regulatory compliance issues. In parallel, regulators will begin to automate surveillance to monitor trading operations for patterns of abuse.

Alpha goes to the Firm with the Best Algorithms

Algorithmic trading is now entering the mainstream. In the earlier days, possessing pre-packaged black-box algorithms was enough to generate Alpha. Alpha now goes to the firm with the best algorithms and what is considered best changes by the day. Only the firms that can introduce new and innovative algorithms quickly will able to benefit from rapid market changes and the new trading opportunities that constantly emerge.

11

Algorithms: Areas of Concern

Lack of Visibility
We know what a specific algorithm is supposed to do, measure its pre-trade analytics and see how the post-trade results match up to that expectation. But if the trader didnt select the most optimal algorithm for that trade little can be done. This problem is caused by a lack of visibility and transparency into the algorithm while it is executing orders.

Algorithms Acting on Other Algorithms

If fund managers trading pattern is spotted and regular; tracked with the use of algorithms, then these algorithms are liable to be reverse engineered. This implies that their buy and sell orders are pre-empted and used to the maximum effect by their competitors. Here, algorithms are acting on other algorithms.

Which Algorithm to Use?

With brokers offering many algorithmic strategies, one concern is that buy-side institutions lack the tools to understand which algorithm to use for a particular stock. The lack of a standard benchmark has made it almost impossible to assess the quality of algorithms. Buy-side firms are having a hard time evaluating when to use a particular algorithm. For example, if a portfolio manager tells a trader to sell a mid-cap, semi-illiquid stock within five hoursbecause the manager has to raise cashthe trader may be confused about which algorithm would be the best solution, given the constraints on liquidity and time. They need a certain level of sophistication and understanding to use it. Algorithmic trading requires careful real-time performance monitoring as well as pre and posttrade analysis to ensure it is properly applied. Traders must calibrate the algorithms to suit portfolio strategy. Far from the sole or final answer to best execution, algorithmic trading represents an additional tool in a traders expanding kit. Far more important is aligning execution choices with the level of order difficulty involved in terms of: order size, liquidity, and trade urgency. Low touch venues such as algorithmic trading lend themselves best to easier types of orders such as low-urgency and small orders for large cap stocks. But urgent orders for a large volume of small cap stocks would require a higher-touch approach to ensure best execution and cost efficiency. Missing IngredientThe Traders Gut Feel Algorithms are simply advanced trading tools and they cannot replace the human elements or make interaction redundant. Algorithms fail to capture a traders gut feel. It is the intraday trading characteristics of a stock that assist a trader in determining the right strategy, whether to back off or be more aggressive. In order to allow their guts to play a proper role, the traders need to see precisely what actions their algorithms are taking, what venue the orders are being sent to, and where they get filled. It is early in the development of trading software to think that the thought process of a human trader can be mimicked by an algorithm. Algorithms can not compete with the ability of the human brain to react to unanticipated changes and opportunities. Some algorithm providers are trying to addressing this issue by offering instant messaging (IM) services that work with the algorithm. As trades go on, a trader is alerted of issues that arise and the trader can alter the strategy depending on the nature of news.

12

At the end of the day, its the clients who drive the demand and innovation necessitating next generation algorithms. The next generation of algorithms will be able to speak to the trader, to let the trader know what is going on dynamically, and allow the trader to interact with the algorithm. Soon we will have adaptive algorithms that adjust their execution at each moment in time in response to what they see happening in the market just as a human trader.

History of arbitrage in India

Arbitrage is not a new concept in India. Although the level of activity was not significant, market players have engaged in intermarket arbitrage for a long time.

Line operators (Inter city)

In India, weve had over a decade of experience with multiple stock exchanges and line operators arbitraging between these markets. This has been a fairly well accepted idea. These arbitrageurs mostly operated between Bombay, Ahmadabad, Calcutta and Delhi. They used telephone 76 The Life of an Equity Derivatives . . . lines and PTI screens to locate the difference in prices. The main centres for arbitrage though were Bombay and Calcutta. Here is how the arbitrage happened. There were brokers who either had cards on both the exchanges, and alliances with members of the other exchanges. By calling up the other exchange, the rates for a stock (for example, Reliance or ACC) were determined. Typically, the difference in prices across exchanges would be about one to two percent. The stock would be purchased on the exchange where it quoted at a cheaper price and sold on the exchange where it traded at a higher price. The settlement cycles of the exchanges were different so the delivery that was received from one exchange could be given to the other exchange. If there was short delivery, the transaction would be carried forward. However, these operators suffered risks of settlement due to movement of stocks and funds across the country. The stocks had to be moved in the physical form between the two markets and, amongst other risks, there was the risk of bad delivery. Due to the high risk involved in this operation, the returns were also high, with the activity limited to a few brokerage houses.

NSEBSE (Intracity manual traders)

In the mid 90s, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) went electronic and moved over to screen based trading. The period witnessed huge volumes due to arbitrage between these exchanges. The arbitrage process involved two people working as pairs. The pairs concentrated on one or two scrips at a time. This process generated high returns, typically around 11.5 percent per week. Here is how the arbitrage worked. 13

The settlement cycle at NSE was Wednesday to Tuesday and that at BSE was Monday to Friday. Positions could be built up during the entire week, and unwound on the last day. The residual or the portion that was not unwound would go for delivery. Since most of the traders did not have the funds or stocks to take or give delivery, there would be a mad scramble to square off the transactions on Tuesday and on Friday, the last date of settlement on the NSE and the BSE, respectively. During a typical week, traders would mostly have buy positions which they would want to square off at the end of the cycle. This would result in depressed prices at NSE. Derivatives Markets in India: 2003 77 At the same time, the trader would want to maintain the buy position, so he would buy the same stock on the BSE. This would result in inflated prices on the BSE. The gap in prices of the same stock across NSE and BSE would be between half percent to two percent. The arbitrageur would now enter the scene. He would buy the stock where it traded cheap, i.e. on the NSE, and sell it where it was more expensive, i.e. on the BSE. On Wednesday, the arbitrageur would sell it on the NSE and buy the same stock on the BSE for a modest return. The effect of this trade was that the long position was squared off on the BSE and no cross delivery of stock was required. (This mattered because of bad delivery problems which were rampant then). On Friday the entire process was repeated: the arbitrageur bought stocks on the BSE and sold them on the NSE. On Monday, he would again buy at NSE and sell at BSE. Table 4.1 shows the cycle as it typically happened. The net returns in a week would be between one to three percent.

CHAPTER 3

14

LITERATURE REVIEW
Research Paper 1 This paper was given by Archit Bansal, Kaushik Mishra & Anshul Pachouri ( Jayppe Institute of Information Technology University A-10, Sector 62, Noida (U.P) 201010) on the topic of Algorithmic Trading (AT) - Framework for Futuristic Intelligent Human Interaction with Small Investors. Background:Algorithmic trading has become more popular with large institutional investors these days. Big investment giants and top corporate notches are taking undue advantage of these algorithms over small investors. The one of the most critical factor which is limiting small investors to use these algorithms is lack of interactive user interface. This paper proposes a framework for intelligent interaction of these trading algorithms with the user which maintains required user adaptability, modelling and knowledge sharing in the coming future. Further the paper discuss about the various trading algorithms, their areas of concern and its likely impact on the market presently and in coming future. Findings:In Algorithmic trading orders are placed with the algorithm which decides on various aspects of the order such as order price, size, timing of purchase etc. Usually these algorithms are used in bulk buying of shares. A large order is broken into smaller slices and placed at different interval of time so as to obtain the optimum value for the purchase. Needless to say that these algorithms are quicker in all aspects compared to manual trading. There are various powerful algorithms being used by various organizations like:1) Volume Weighted Average Price (VWAP) :- When a bulk order is placed the algorithm breaks it into several smaller orders according to the historical data as computed to be optimum. Volume curves are generated which describe the objective buying. In case of intra-day buying if large fluctuations are observed then the curve is interpolated accordingly to reflect the current scenario. Orders are executed according to the volume curve as long as they are within the maximum order size supported by the algorithms. 2) Time Weighted Average Price (TWAP) :- This model is a special case of VWAP model. Here we assume that market position would be stable all through the day. The historical data that we take generates a flat volume curve. The bulk orders are simply broken on the basis of time. Generally there is a constant time gap between the orders placed. 3) Market On Close (MOC) :- This algorithm is useful in the financial derivative markets and securities which are auction based. In general this algorithm is used when trading is to be started after a particular time. Like in the case of auction based trading, bids are accepted after the starting time only. It functions on the basis of a time trigger, Algorithm waits for the time trigger and starts functioning after that. Research Paper 2

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This paper was given by Mr. Gourav Gupta & Umesh Nihalani (Manager Financial Sector Ratings, CRISIL Ratings) on the topic Growing Interest In Algorithmic Trading Set To Change Competitive Dynamics In Equity Broking. Background:Interest in high-speed trading tools such as algorithmic trading is growing in Indias equity markets. One sign of this increasing interest is the recent approval granted by the National Stock Exchange of India Ltd to 200 of its members to offer algorithmic trading services. CRISIL believes that this holds potential to improve the efficiency of Indian equity markets and change the competitive dynamics in the Indian equity brokerage industry. CRISIL believes that large institutional brokers with the ability to invest in system infrastructure and skilled manpower are likely to benefits. Arbitrage traders, especially ones focused on manual arbitrage trading, are likely to face pressure on their earning profits. Findings:The following are the major findings in the research:1) Market Efficiency to Improve:- Algorithmic trading enables automated trade execution through pre-programmed strategies. These tools minimise impact costs and increase the speed of executing large trades, thereby improving systemic efficiency. 2) Differential Impact on Market Participants:- Algorithmic trading captures and exploits arbitrage opportunities much faster than manual trading can. Thus, by adopting algorithmic trading, large institutional brokers will benefit, while the yield of manual arbitrage traders will narrow. 3) Large Institutional Brokers to Benefits:- CRISIL believes that large institutional brokers stand to gain because their stronger capital profiles will enable them to make greater investments in technology and skilled manpower. Introduction of algorithmic trading techniques will also allow institutional brokers to widen their product suite and capture greater order flow from institutional investors. 4) Arbitrage Traders to Face Narrower Yields:- Algorithmic trading is likely to shrink the arbitrage yield of manual arbitrage traders. This is because algorithmic trading captures arbitrage opportunities much faster than manual trading can. Traders who focus on intraday arbitrage, and use manual platforms are likely to see trading volumes and yield shrink. 5) Investment in Technology and Skilled Manpower Vital:- The competitive advantage will rest with players who invest in quality and scalability of system infrastructure, and capitalise on first-mover advantages. The key differentiators will be ability to provide highspeed trading services, and introduction of innovative algorithms to capture trades, backed by superior risk management practices.

Research Paper 3

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This paper was given by S K Rao (Senior Business Consultant with the Financial Services practice of TCS) on the topic of Algorithmic Trading: Pros and Cons.

Background:Algorithms have become a must-have for brokers seeking to gain new business and retain their current clientele. Trade carried out using algorithms is known as algorithmic trading. Algorithmic trading can be defined as placing a buy or sell order of a defined quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm. The rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on the price of the financial instrument. Algorithmic trading is a way to codify a traders execution strategy. Algorithmic trading or computer-directed trading cuts down transaction costs and allows fund managers to take control of their own trading processes.

Findings:Algorithms are widely recognized as one of the fastest moving bandwagons in the capital markets. Employing rules-based strategies has enabled buy-side firms to increase productivity, lower commission costs and reduce implementation shortfall. Algorithmic trading cuts down transaction costs and allows investment managers to take control of their own trading processes. By breaking large orders into smaller chunks, buy-side institutions are able to disguise their orders and participate in a stocks trading volume across an entire day or for a few hours. More sophisticated algorithms allow buy-side firms to fine-tune the trading parameters in terms of start time, end time, and aggressiveness. In todays hyper-competitive, costconscious trading environment, being the first to innovate can give a broker a significant advantage over the competition both in capturing the order flow of early adopters and building a reputation as a thought leader. The best execution through use of algorithmic tools depends to a large extent on the presence of various critical ingredients, such as: I. Clear understanding of portfolio management strategies objectives II. Robust pre-trade models III. Balancing timing and impact cost issues IV. Effective intelligent integration of OMS and direct market access trading platforms V. Close, iterative relationships with algorithmic trading providers VI. Thorough post-trade analysis and feedback.

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Research Paper 4

This paper was given by SYBASE on September 2007 on the topic Quantitative Algorithmic Trading. Background:All across the investment banking industry there is abuzz with talk of algorithmic trading. These techniques can be defined as the placing of a buy or sell order of a set quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm. As a number of hedge funds rake in extraordinary revenue via their algorithmic techniques, investment banks are racing to catch up. The application of algorithmic trading threatens to revolutionize the entire trading environment. With the rise of the machines, trades will be conducted ever faster and at ever higher volumes. The most radical proponents have argued that algorithmic techniques threaten obsolescence for the human trader, replaced by the split-second accuracy of a delicately coded, multi-purpose suite of atomized trading techniques. Full acceptance of algorithmic techniques will transform the securities industry and this report will investigate how banks hope to develop their algorithmic trading systems to take advantage of present and impending opportunities. Findings:The key issues both in the current market and future market, the major demands are for speedy risk modeling, effective back data capture and utilization, and reduction of internal latencies in order to capitalize on ephemeral market dislocations. All houses are looking to have an algorithmic trading platform in place that can deal with these major pain points. Speed-out-of-shop is a fundamental requirement that has until now recently received insufficient attention. Indeed, many of the leading banks could be accused of external latency monomania, as the need to achieve best execution under MiFID and Reg NMS has consumed all attention. It is difficult to estimate exact figures for the speed requirements out-ofshop, as the goalposts are moving constantly. In effect, banks find themselves in an arms race, similar to the one being fought over external latency, as the pressure of maintaining competitive advantage drives ever faster execution. As external latencies and internal latencies decline, increasing battles will be fought over the quality and quantity of data that banks can store. Banks are looking to capture and store more of the back data from their trades in order to hone more precise and efficient algorithms. The data explosion as result of the interplay between regulatory moves, business pressures and the application of more and more algorithmic techniques is creating a feedback look, feeding the demand for algorithmic trading and straining the infrastructures of all banks. The specific data requirements remain strategy dependent. However, the more data that can be stored, and the quicker this data can be accessed, the easier the development of more efficient algorithms. Thus, banks will look to the most efficient data warehousing solutions in order to ensure an in depth store of high quality data that can be rapidly leveraged to develop new techniques required by market developments.

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Research Paper 5 This paper was given by Ashok Jogani and Kshama Fernandes on the topic Arbitrage in India: past, present and future.

Background:A central idea in modern finance is the law of one price. This states that in a competitive market, if two assets are equivalent from the point of view of risk and return, they should sell at the same price. If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices (Sharpe & Alexander 1990). The buying cheap and selling expensive continues till prices in the two markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore market efficiency. Theoretical arbitrage requires no capital, entails no risk and appears to be an easy way of earning profits. However, realworld arbitrage calls for large outlay of capital, entails some risk and is a lot more complex than the textbook definition suggests. A major weak link in Indias financial sector today is inadequate knowledge about arbitrage. This explains the low levels of financial capital deployed in it.

Findings:Arbitrage is a fascinating process. Theoretically, an arbitrage opportunity is like money lying on the road waiting to be picked. The trick of the trade is in being able to spot the opportunity quickly. Besides an understanding of the markets, the processes and the risks involved, exploiting arbitrage also requires capital and infrastructure. In some markets, it is possible to detect and capture arbitrage profits manually. The execution of an arbitrage trade today is fairly simple. However, as derivatives get more complicated, the procedures employed for doing arbitrage will steadily get more complex. This will require new skills to be developed and new processes to be formulated. With the introduction of multiple new products, faster trading mechanisms and more efficient markets, it may prove to be impossible for the human eye to detect or act upon arbitrage. We would then have to rely on computers. As computers get into the game, arbitrage opportunities would be quickly wiped out. There would however always be smart operators who would find ways to use new products and new markets in order to continue the arbitrage game.

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Research Paper 6 This paper was given by Benjamin Becar (Product Manager, Valdi Algorithms, SunGards global trading business) 0n the topic Algorithmic trading: a complex map Background:Algorithmic trading is a global phenomenon, but the subject is a complex one, and there are major differences of market maturity in different parts of the world. In this White Paper we try to bring some context and clarity to a description of the state of the art. We consider first the issue of definition, and describe the various types of algorithm that exist: decision-making, execution and execution pluses. We then look in more detail at execution algorithms, and how their usage is developing across different regions and asset classes. Finally, we discuss the various technical approaches that can be taken by a brokerage firm to establish or extend its algorithmic trading capabilities. We all try to understand the big picture when getting to grips with a financial market topic, but with automated trading the pictures multi-faceted shape presents us with a challenge. And within that big picture, defining precisely what algorithmic trading is (and is not) involves further complexity: understanding of this term depends heavily on who you are talking to, and on where in the world they are located. For big-picture purposes, automated trading can be defined as any automated action on an order, which may take place at any stage of the trade execution process: order creation, sending, and modification or matching. There are then a number of different automated trading worlds to be considered. The challenges that participants face in different areas of the markets are widely varied, and deeply impacted by a range of factors. Findings:In September 2011, a UK Government Foresight panel forecast that The number of human traders employed in the financial markets is set to fall dramatically over the next ten years as banks and brokers become increasingly reliant on computer-based algorithms to run their trading operations. Clearly, the panels research led it to conclude that the trends described in this paper are set to continue, and could even accelerate: so there will be more automated trading across the board, and with increasing complexity. Our objective at SunGard has been to provide a modular toolkit a set of building blocks to help with the management of this complexity. Our Valdi Automated Trading suite provides a range of solutions including support for real-time Excel spreadsheet trading from the desktop, program trading, strategy and pairs trading and index arbitrage. We also offer a range of support for algorithmic trading at the execution level, the fit depending on the problems our customers are trying to solve, and on where they want us to assist with the order flow. Brief details follow below:i. Off-the shelf ii. Customized iii. Broker algorithms iv. Partnership with StreamBase.

Research Paper 7 20

This paper was given by Guy Debelle of the Reserve Bank of Australia on September 2011 on the topic High-frequency trading in the foreign exchange market.

Background:In March 2011, the Markets Committee established a Study Group to conduct a fact-finding study on high-frequency trading (HFT) in the foreign exchange (FX) market, with a view to identifying areas that may warrant further investigation by the central banking community. This initiative followed from a number of previous discussions by the Committee about factors contributing to changes in the structure of the global FX market. The Study Group was chaired by Guy Debelle, Assistant Governor of the Reserve Bank of Australia. The Group drafted an interim report for review by the Committee in May 2011. The finalised report was presented to central bank Governors at the Global Economy Meeting in early September 2011, where it received endorsement for publication. The subject matter of this report is clearly part of the core expertise of the Markets Committee, which has a long-standing interest in the structure and functioning of the FX market. I hope this report will serve as a timely input to the ongoing discussion about the impact of technological changes, including the rise of algorithmic trading in general and HFT in particular, on the functioning and integrity of financial markets. The FX market focus of this report should also be a valuable complement to a discussion that has so far been based mostly on developments in equity markets.

Findings:The growth in algorithmic and high-frequency trading in foreign exchange is likely to have significant implications for both the structure and the functioning of the global FX market. Policymakers will need to keep abreast of changes in this space. In some cases, this is happening through the involvement of policymakers in the Foreign Exchange Committees in various jurisdictions. Beyond that, policymakers should develop appropriate contacts and maintain a dialogue with (i) The various foreign exchange trading platforms, (ii) The prime brokerage service providers, and (iii) The algorithmic and high-frequency trading community in FX in order to track developments and to identify key policy issues in a timely fashion.

Research Paper 8 21

This paper was given by Alain Chaboud, Benjamin Chiquoine, Erik Hjalmarsson & Clara Vega on June 13, 2011 on the topic Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market. Background:The impact of algorithmic trading in the foreign exchange market using a high-frequency dataset representing a majority of global interdealer trading in three major currency pairs, euro-dollar, dollar-yen, and euro-yen, from 2003 through 2007. We find that human-initiated trades account for a larger share of the variance in exchange rate returns than computer initiated trades: humans are still the informed traders. There is some evidence; however, that algorithmic trading contributes to a more efficient price discovery process via the elimination of triangular arbitrage opportunities and the faster incorporation of macroeconomic news surprises into the price. We also show that algorithmic trades tend to be correlated, indicating that computer-driven strategies are not as diverse as those used by human traders. Despite this correlation, we find no evidence that algorithmic trading causes excess volatility. Furthermore, the amount of algorithmic activity in the market has a small, but positive, impact on market liquidity.

Findings:Using highly-detailed high-frequency trading data for three major exchange rates over 2006 and 2007, we analyze the impact of the growth of algorithmic trading on the spot interdealer foreign exchange market. Algorithmic trading confers a natural speed advantage over human trading, but it also limits the scope of possible trading strategies since any algorithmic strategy must be completely rule-based and pre-programmed. Our results highlight both of these features of algorithmic trading. We show that the rise of algorithmic trading in the foreign exchange market has coincided with a decrease in triangular arbitrage opportunities and with a faster response to macroeconomic news announcements. Both findings are consistent with computers having an enhanced ability to monitor and respond almost instantly to changes in the market. However, our analysis also suggests that the constraint of designing fully systematic (i.e., algorithmic) trading systems leads to less diverse strategies than otherwise, as algorithmic trades (and in the extension, strategies) are found to be more correlated than human ones. In addition and partly motivated by the finding that algorithmic trades tend to be more correlated than human trades, we also analyze whether the fraction of algorithmic trading in the market has any relevant causal effect on market liquidity or excess volatility. We find some evidence that algorithmic trading has a slight positive effect on market liquidity in the euro-dollar and dollar-yen market. Furthermore, we find no evidence to back the often-voiced concern that algorithmic trading leads to excessive volatility in any of the three currency pairs we analyze. One caveat we would like to add to this analysis is that our study does not cover a truly tumultuous period in financial markets; we are thus still uncertain about how algorithmic traders may behave in a crisis period.

Research Paper 9

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This paper was given by ARIAL LIMITED (PO BOX 16003, RAK (Ras Al Khaimah), U.A.E) on the topic Algorithm Trading: SmartTrader.

Background:SmartTrader is a unique Algorithmic Trading system one of its kind available for retail HNI investors in the market. SmartTrader is built with the intention of creating sustained capital growth while carefully managing the risks. Typically, Algorithmic Trading has been property of mainly Hedge Funds and Fund of Funds with a key focus on arbitrage trading. We have developed SmartTrader to make it available to retail investors using over 10 years of trading experience to cover the areas where most traders eventually go wrong. There are 2 key aspects to trading 1. Nonbiased decision making and 2. The speed at which these decisions are made and trades are executed. SmartTrader uses proprietary mathematical models to decide on trends and trades. It's the only product of its kind available to retail investors.

Findings:SmartTrader has been developed over the last 4 years by a team of very dedicated experts. The contributors have decades of trading experience. All the models developed and incorporated into SmartTrader is based on proprietary formulas. SmartTrader has also incorporated some of the best followed money management strategies. SmartTrader Strategy :- SmartTrader works only on short term cycles. This ensures that there is a very high level of liquidity in your account. Also, since the strategies are short term, profits and losses are booked on a daily basis. SmartTrader stops operating after achieving the daily gain or if the strategy hits the pre-defined draw-down level. This enables the customer to have access to their funds without having to wait almost on a daily basis. Very rarely (less than 5% of times) SmartTrader carries overnight positions which require maintenance of required margin capital in the account. Risk Management :- The inherent risks of trading the markets are mitigated in several ways. This includes diversification across a wide range of products such as Commodity, Indices and Currency futures. SmartTrader's non-biased decision making allows it to reverse positions in case of adverse market movement. Maximum draw-down levels are pre-set into product and monitored at all times. If the pre-defined draw-down levels is reached, then, SmartTrader stops operating for the day.

Research Paper 10

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This paper was given by Willard John Thomas Associates on August 2010 on the topic Algorithmic Trading in India.

Background:Capital markets in India are very mature and supportive of institutional investing and trading. To date algorithmic trading has not played a major role. We feel this is changing rapidly.

Findings:India represents a clear frontier opportunity for algorithmic (quantitative and / or systematic) traders due to the confluence of several factors. 1) A supportive legal and regulatory framework 2) Well established and liquid stock exchanges 3) Sophisticated technology and connectivity to the exchanges 4) Presence of all major banks and brokerages 5) Abundance of people with relevant knowledge and experience 6) A dearth of players in the space (limited competition). Given the existence of major banks such as JP Morgan, Morgan Stanley, HSBC, Credit Suisse and Goldman Sachs, etc., it is probable that the current window of opportunity will close sooner rather than later as sophisticated players recognize this opportunity and make the requisite investments. Timing is difficult to estimate but given the amount of time necessary to develop, test and implement the sophisticated computer models, connect to the exchanges and establish the legal corporate structure to trade, a range would seem to be 1 to 3 years for early adopters and 5 years before all major players with an interest are active in the market. The major exchanges are the National Stock Exchange and Bombay Stock Exchange. There are a host of regional exchanges as well as a couple new ones trying to enter the business. FIX connectivity is available at the major exchanges but it is non-native so utilizing the exchanges native protocol is a more likely solution for latency sensitive systems. Co location is or will be available at both the major exchanges (currently at NSE but announced by BSE.)

Research Paper 11 This paper was given by Pavitra Kumar, Michael Goldstein, and Frank Graves on February 2011

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On the topic Trading at the Speed of Light: The Impact of High-Frequency Trading on Market Performance, Regulatory Oversight, and Securities Litigation Background:High-frequency trading (HFT) describes the execution of electronic trading strategies involving extremely rapid capital turnover. It is characterized by the use of computer algorithms to analyze quote data and detect and exploit trading opportunities, with windows as short as milliseconds or even microseconds. High-frequency traders compete on a basis of speed for an abundance of very small but fairly consistent margins. While no institution explicitly tracks the performance of highfrequency funds, anecdotal evidence suggests that high-frequency trading firms generated mostly positive returns during the recent credit crisis, reinforcing the growing popularity and volume of HFT activity. The vast majority of volumes now traded on the New York Stock Exchange (NYSE) and other U.S. exchanges are HFT transactions. In this newsletter we describe the evolution of high-frequency trading over the past decade and some of the key features of HFT strategies. We also evaluate the impacts that high-frequency trading has had on the markets, investigating issues such as the fairness of HFT practices, whether HFT improves market efficiency, how it affects market liquidity, and whether it has potentially adverse side effects such as increasing price volatility. Finally, we examine the regulatory and legal implications of the current prevalence of HFT, and summarize the proposed solutions to the concerns that high-frequency trading has recently created in the markets. Findings:High-frequency trading is clearly here to stay, given that it has been riding a wave of technological momentum and innovation over the past decade. However, HFT has recently been generating a great deal of controversy, some of which may be an over-reaction. In principle, high-frequency trading should not have a large impact on prices, given that HFT firms control very little capital and take minute, very brief positions in securities. Moreover, high-frequency traders can provide greater liquidity and market efficiency, either by acting as market-makers or as statistical arbitrageurs across markets. On the other hand, errant or poorly designed HFT programs without necessary risk controls could lead to occasional shocks or disruptive events, such as those we have witnessed globally over the past year. In addition, the implementation of certain HFT strategies has raised concerns about their fairness, given the availability of certain tools to high-frequency traders that are not widely available to other types of investors. As a result of the controversies surrounding HFT and other less transparent corners of the markets, the CFTC and SEC are conducting ongoing investigations of the impacts of these strategies, and proposing solutions to address their potentially adverse side-effects. Finally, the increased volume of HFT over the past decade creates several possible ramifications for securities litigation in the future, to the extent that it changes our understanding of market efficiency and other metrics that affect liability and damages estimation in lawsuits.

CHAPTER 4

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4.1 COMPANY PROFILE

Dion Global Solutions provides market leading software solutions to financial institutions across Asia Pacific, Europe, India South Asia, Americas and the Middle East and Africa. Employing over 600 highly experienced and knowledgeable staff within the Finance and IT industries, Dion provides portfolio of cutting-edge solutions and services for the international financial markets. With over 25 years of experience, Dions breadth of knowledge in the financial services industry has provided the company with a unique insight into the complexities involved across various segments within the BFSI sector. Dions solutions cover portfolio management, trading, settlement, risk management, compliance, analytics, messaging & workflow and research services and information products. Committed to providing the very best, Dion works alongside clients and world renowned technology partners to implement and support solutions to increase productivity, reduce costs and facilitate growth. With more than 650 clients in 88 countries, Dions deep domain expertise and considered approach to their clients businesses make Dion a trusted partner.

Associate Companies
Chase Cooper specializes in enterprise wide Operational Risk Management software and consulting. Their award winning software solutions have been deployed in over 50 countries and is used by some of the worlds leading financial institutions. A recognized market leader in operational risk management solutions, consultancy services, training and resourcing they are consistently ranked in the Top 5 vendors in industry polls. www.chasecooper.com Swissrisk Financial Systems is a financial software specialist with a long standing strength in providing solutions for messaging and workflow and securities and foreign exchange trading. Swissrisk Financial Systems partners with clients to anticipate and deliver custom solutions using their off the shelf portfolio of core applications. www.swissrisk.com

Associate Partners
A global trading network, Marco Polo provides an electronic gateway to global emerging markets via a FIX-enabled network. Specializing in emerging markets, Marco Polo also provides connectivity to some of the worlds largest markets. Marco Polo clients consist of some of the largest international and local stockbrokers, institutional asset managers, arbitrage and high frequency traders and hedge funds. With the ability to 26

accommodate all trading strategies, Marco Polo can meet the needs of any broker by providing a single point of access, greater process efficiency and reduced operational costs. www.marcopolonetwork.com

Technology Partners
Mahindra Satyam

Mahindra Satyam is a leading global business and information technology services company that leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance. The company's professionals excel in enterprise solutions, supply chain management, client relationship management, business intelligence, business process quality, engineering and product lifecycle management, and infrastructure services, among other key capabilities. Mahindra Satyam is part of the $15.4 billion Mahindra Group, a global industrial federation of companies and one of the top 10 business houses based in India. The Group's interests span automotive products, aviation, components, farm equipment, financial services, hospitality, information technology, logistics, real estate and retail. www.mahindrasatyam.com

Oracle

Founded more than 30 years ago, Oracle is the leading integrated business software and hardware provider with more than 370,000 customers in more than 145 countries around the globe. Oracle is the only vendor able to offer a complete technology stack in which every layer is integrated to work together as a single system. www.oracle.com

Macquarie Telecom

A leading supplier of Information and Communications Technology throughout Australia and Asia, Macquarie Telecom was established in 1992 and works exclusively with the business and government sectors. They provide a range of voice, data, mobile, mobile data and hosting solutions to over a million users in more than 3000 companies. www.macquarietelecom.com

Microsoft

Founded in 1975, Microsoft Corporation is a an American multinational corporation headquartered in Redmond, Washington,

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United States that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions. www.microsoft.com
Numerix

Dions hosted, multi-asset class pricing, valuation and risk management solution for the OTC derivative community is powered by Numerix and its award-winning Numerix Cross Asset Library. This seamless integration affords traders native access to proven, market accepted models across the broadest range of asset classes. Since its inception in 1996, over 700 clients and 75 partners across more than 25 countries have come to rely on Numerix analytics for speed and accuracy in valuing and managing the most sophisticated financial instruments. www.numerix.com

4.2 COMPANY PRODUCTS

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TradeAnywhere
The impact of more stringent regulations and progressing technology within the financial services industry has led to a more complex trading ecosystem. Often, firms require more than one platform to go about the business of trading, which leads to increased costs and resources. An end-to-end trading solution, TradeAnywhere is designed to provide a flexible and scalable solution that caters to all of your trading needs. Consisting of a suite of components for online trading, order routing, execution and market data dissemination (such as quotes, charts, news and research), TradeAnywhere is tightly integrated with a versatile and parameterized real time risk and exposure management system that is configurable to match the risk appetite of the broker. The system is capable of capturing orders from the end user directly through the internet or any other network or through a dealer or broker. TradeAnywhere has a range of components to facilitate order routing, market data dissemination and order execution that include: Risk Management System Dealer front end (thick Client) Browser based streaming front end Browser based non-streaming front end Ticker plant Order manager System admin utility Integration with SMS gateway Integration with call centre Mobile phone enquiry Key Features An automated order routing system that provides a quick turn-around time, to beat rapid fluctuations of the market. A centralized risk management solution with surveillance and administration interface. An integrated solution for multi-exchange, multi-bank and multi-depository. Real-time quote display and distribution system Ticker Plant middleware.

Sub Products

TAW India: The TAW India solution provides trading capabilities and market information for all of the major Indian stock exchanges: BSE, NSE

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Market Pulse: Market Pulse is a market data capture, dissemination and analytical tool delivering financial service providers with the ability to offer their clients real-time market information from a range of markets and sources. Fast Trade: Designed to provide the highest level of productivity, Fast Trade is a versatile front-end trading application specifically targeted at the growing and demanding needs of a dealer / trader across all markets. The front-end easily plugs into the TradeAnywhere suite of applications and supports all the requirements of the dealer / trader across equities, derivatives and commodity segments. Providing predefined and user-configurable workspaces, Fast Trade offers a complete set of menu items and icons, shortcut keys, the ability to search and select and an intuitive working interface.

Trade Express: With the ever increasing integration of mobile phones in our daily lives, mobile trading has become the new wave of change in todays economy. A wireless solution, Trade Express provides trading institutions the ability to deliver realtime mobile financial services to its customers. Providing full order functionality including order placement, real time quotes, top gainers and losers and an overview of indices through a fast, user-friendly and secure application, available anytime anywhere.

Web Tradez: Web Tradez is a complete web based platform to allow users to monitor market data, maintain portfolios, place orders and check the status of the orders placed. WebTradez is available as both a streaming and non-streaming interface.

Asset Anywhere
Increasing online transaction capabilities for IPOs, Mutual Funds and Fixed Income asset classes increases convenience and enhances service levels for customers. AssetAnywhere is a web-based solution which provides the ability to execute transactions in IPOs, Mutual Funds, Bonds and Debentures through the internet, via a branch or a franchise network. The system also caters back office processes related to IPO management, inclusive of form printing and electronic submission of bids to the exchanges. It automatically generates the feed files needed by the asset management companies and the registrars. AssetAnywhere can be deployed as a stand-alone solution or as a module of TradeAnyhwere. Key Features Separate payment gateway integration. Easily integrated with distributors portal. 30

A standalone system that maintains cash process; The client could either deposit a cheque or perform a fund transfer for an order placement. Distributors can restrict modifications and cancellations in the system according to their requirements. System allows NRI users to place orders for IPOs and Mutual Funds.

Fundboss
The Funds Management domain has experienced considerable growth over the years with much of it fuelled by increased cross-border activity and the prevalence of globalization. Managing operations effectively in this environment whilst the industry is in a state of rapid growth is proving to be difficult, given the manual nature of tasks and the likelihood of significant discrepancies. A complete mutual fund distributors back office solution, Fundboss reduces the need for manual data entry, ensuring increased accuracy and efficiency through a wholly integrated secure platform. Fundboss comes equipped with a central repository that stores all relevant information such as transaction tracking, brokerage calculations, brokerage reconciliation and commission calculations, allowing for accurate auditable records and avoids duplicity in investor creation. The solution also provides a web platform for customers to check their portfolios with the current net asset value, and profit and loss.

Key Features

Provides portfolio tracking at different levels that include: o Registrar o Asset management companies (AMC) o Scheme o Branch o Relationship managers (RM)Investor Supports investments, redemptions and switches/Imports: o Investor details o Transaction details o Assets under management details Calculates: o Brokerage Receivable o Commission Payable o Portfolio, Allocation, Returns Reconciles: o Brokerage o Commission o Assets Under Management (AUM) Comprehensive Drilldown Reporting

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Acquire
Increasing regulatory pressure on the financial services sector means that the customer acquisition process must undergo a range of processes that includes documentation vetting, identity checks and KYC requirements. This increased regulatory overhead paired with the requirement for more efficient and accurate customer on-boarding presents a unique challenge. Acquire is a webbased customer acquisition tool that allows branches to initiate and manage the client account opening process while following structured user definable workflows and document paths . The solution automates, centralises and standardises the customer acquisition process such that client account details can be verified, checked for duplication and completeness and either routed back to the respective client, branch or internal department for review and / or correction or onto the next stage for further processing. Acquire allows for the setting of different processing rules based on product and account types. Acquire also presents the opportunity to efficiently open accounts with more confidence in data correctness and move customers through your on-boarding process to boost their customer service experience.

Key Features

Web service driven data verification (eg. PAN verification) Single entry at remote location View of account status Customer email / SMS integration upon completion Generation of single view profile sheet Management Information System (MIS) Real-time courier tracker

iReward
Historically low brokerage rates coupled with customer portability creates a challenge in retaining and increasing transaction volumes without sacrificing revenue.

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iReward is a web based frequent flyer solution that creates a differentiating value-added service to customers by providing the ability to calculate points based on business generated by the customer and the redemption of those points for gifts maintained in your own gift register. The solution calculates the rewards points based on user defined client category schemes and is supported by a complete range of components to manage redemptions, inventory and customer statements.

Key Features

User defined points calculation schemes Online client redemption module and client point history Sweepstakes feature for special events and promotions Easily integrated into your existing web presence Customizable statements

4.3 COMPETITORS AND ITS PRODUCTS Omnesys

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Omnesys is a leading provider of software for Securities markets worldwide. Omnesys products range from multi-asset, multi venue trading systems, market data and connectivity solutions to buy-side and sell-side firms, consumer oriented trading terminals and websites. The main product suite Omnesys NEST is available as a firm or broker hosted model, and in a Software As a Service (SaS) Model. Omnesys NEST is a platform of choice for leading institutions, exchanges and brokers in India. OMNESYS NEST is used by more than 200 of the top institutions in India as well as various exchanges which provide OMNESYS NEST as a front office service to their customers. The software as a service model is available to all the members of the exchanges and covers the entire trading community. Omnesys NEST is a fully integrated eco-system for securities including Order Management System, comprehensive pre-trade risk management systems, supports various types of front ends, automated trading systems, and Algos. Omnesys NEST also provides FIX execution capabilities and APIs for both buy and sell side firms. With exceptional throughput and scalability capabilities, NEST has captured significant market share in the Indian markets within a short period of time. A substantial percentage of the volumes on the markets happen through Omnesys NEST automated trading systems and algos. OMNESYS is a privately held company based in Bangalore. DOTEX(A wholly owned subsidiary of NSE) and Intel Capital have minority stakes in the company. The company has Offices in Bangalore, Mangalore, Kolkata, Delhi and Mumbai. Products : Order Management Internet Trading Mobile Trading Arbitrage Strategies Option Strategies Execution Strategies Technical Analysis Tools DMA Solution Execution Management Solution Smart Order Routing Matching Engines Back Office Solutions

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Software As a Service Nest Plus

Nest Gate Omnesys Nest Gate is a comprehensive tool to build extremely customized directional execution algorithms without writing a single line of code. The core idea behind Omnesys Nest Gate is that by providing the essential building blocks of the algorithms, it is possible for you to create/build your own algorithms as well as variants of existing algorithms, in a short span of time at a fraction of the cost of existing competing products. The need for Algo Development of Algo has become a necessity due to variety of market affecting events:

Broker-sponsored direct-to-market trading, Prime Broker, and algorithmic routing Tailored, "smart" execution tools; Direct integration (FIX) Increased trading control / reduced information leakage Lower commission and administrative costs

Popular execution algorithms used today in India include Iceberg, TWAP and Distribution. These execution algorithms need to be developed individually and are not flexible. Modifications to these execution algorithms can be cumbersome and time consuming and requires dedicated resources and allocation issues. Nest Gate You can create Algo using NEST Gate in no time. You can either use the canned Algo and modify the parameters and eventing for order placement or create your own algo template and distribute to user group who can then edit/ modify the template.

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All the NEST Gate Algos are equipped with Smart Order Routing. The SOR engine routes your order to the exchange where the best price is available for the quantity you are seeking. Each algorithm can have three different execution styles:

Aggressive Normal Passive

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Depending upon the market condition any one of these styles can be selected by the person in charge of trading. In the Box of Algos Price Band Percent of Volume Liquidity-Seeker Display Size VWAP IS Your Own Executes an order using time-linear slicing, i.e. worked in equal slices across the specified time frame

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Financial Technologies
Financial Technologies operates a network of multi-asset exchanges which include global and domestic exchanges across India, Dubai, Bahrain, Singapore, Mauritius and Botswana. To ensure that the market reaches out to the most of the market participants wherein they can participate in the price discovery mechanism Financial Technologies intends to come up with a ISV Connect Partner program. This unique partner program would authorize FT ISV Connect Partner status to third-party software vendors that connect their trading solutions to Financial Technologies exchange network via FIX enabled API or proprietary API. ISV Connect program would oblige the exchange and trading communitys demands by offering an expansive range of novel and immaculately integrated trading solutions through strong relationships with our ISV partners. ISV Connect program brings to the table advanced and low latency algorithmic trading platforms, back/middle office processing solutions, efficient risk management systems, order and execution management systems, and trading front end solutions. To be an ISV Connect Partner all participating vendors and developers will be mandated to undergo a FT certification test for the software they propose to employ. This certification would ensure that the vendor's software performs optimal and conforms to all the set procedures for individual exchanges. The team at Financial Technologies would provide a large assortment of services and support in order to assist partners and ISVs in their development and certification/conformance to the following areas. Certification testing and volume testing Technical rehearsals Development support Testing FIX-based implementations The FT Connect ISV Partner Program aims to create enduring business value for firms through: Broad access to multi-asset exchanges in the emerging economies Rapid deployment of trading solutions built on top of proven FT solutions Increased product awareness through a variety of marketing initiatives Extended reach to new customer segments Products:Financial Technologies is the pioneer in introducing an end-to-end STP solution that supports high-density transactions. Our solutions cater to the equity, forex, commodity and derivatives markets, covering all stages of a Trade Life Cycle - Pre-Trade, Trade, and Post-Trade - to deliver single-point transaction fulfillment. Financial Technologies' brokerage solutions suite comprises: Front Office, Middle Office Risk Management, Back Office Clearing, Settlement and Accounting solutions. ODIN our flagship product has been the 'Trading Platform of Choice' for several years powering over 830 leading

38

brokerage

houses

with

more

than

80%

market

share.

Leveraging on the rapid deployment capability for our solutions, we have been able to set up exchanges and make them operational in record time - Dubai Gold & Commodities Exchange setup and operational in record time of 1000 days. Financial Technologies' solutions allow clients the flexibility of Modular Deployment, Customizable Add-ons among others to ensure a best-fit solution to their needs in the fastest time possible. Our solutions come with builtin value adds such as Risk Management System that ensure streamlined operations for the members of the exchange. ODIN ODIN Institutional FIX Connect ODIN Diet Net.net I-Win e-IPO ODIN Program Trading Match E-Hastakshar I-Match Match Messenger Protector Plus DMA LIVE E- Mutual Fund. Technical Algo Trader Technical Algo Trader strategy has been envisaged to help traders to create and track positions on basis of technical conditions without having to keep track charts. Orders will be generated automatically on satisfaction of the conditions. Technical Algo Trader provides customized alerts on advanced collection of technical indicators to support trading decision-making process which makes the application a great tool for active and professional traders. Features: Multi-Exchange, Multi Segment trading functionalities. User friendly interface with exhausting list of Charting tools and indicators User defined Entry and Exit conditions for Long and Short Positions Makes trading experience secure and more profitable by combining rich set of functionalities and ease of use Ability to Create Strategies based on 60+ Indicators by using advanced tools such as ODIN Chart scripting language

39

Crystal clear charts with multiple price styles for effective market analysis

Benefits: Track price action and opportunity with ease Increase efficiency for profitable trade Allows users to exploit the potential of Technical Analysis to time the markets betters A major differentiator tool that can be offered to active traders and highly potential Customers Provides High level of performance and accuracy for tracking market action

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NSE IT
NSE.IT defines Innovation NSE.IT was born as the IT department of National Stock Exchange way back in 1993-94 called as 'System & Telecom', after successfully meeting a series of major challenges, NSE.IT was incorporated as a separate company in October 1999. NSE.IT Limited is a 100% subsidiary of the National Stock Exchange of India Limited (NSEIL) - the 3rd largest exchange in the world, as well as the most innovative stock exchange (NSE). NSE.IT strengthened its position by offering innovative products and services to the security industry as a whole and not restricting it within the Exchange domain. NSE.IT is the turnkey provider in innovating Business solutions like introducing e-learning financial portal in the country, providing Integrated (CM + F&O) Internet trading solution and spot exchange to help brokers in algorithmic trading. How NSE.IT helps? NSE.IT has shown innovation by being focused on developing mission-critical technology solutions for the Financial Services industry and the facilitation of change within these markets. NSE.IT has emerged as the preferred technology partner for deploying high end solutions for the financial services sector. Our software products cater mainly to the finance vertical, insurance and online examination in India and overseas. NSE.IT Limited, a Vertical Specialist Enterprise, offers end-to-end Information Technology (IT) products, solutions and services and has expertise in a wide range of business applications. We specialize in providing complete IT solutions to Stock Exchanges, Clearing Corporations, Brokerage Firms, Insurance Firms and other organizations in the Capital Market, Banking and Insurance industry. NSE.IT a Solution Provider! NSE.IT believes in being an innovative solution provider to its clients, hence it offers a comprehensive range of solutions, with a pool of 600 + highly experienced IT professionals and Business Domain specialists. They are:

Our Innovative Software Services and Products will help you connect to the ubiquitous world of technology and will serve you the best experience, the greatest choice and the best opportunities of the industry. Our product lines are updated with the latest innovations in the trading and financial segments. Our Application services include our ability to deliver highly custom and fast execution Algo solution.

Infrastructure Management Services (IMS), enables our clients to transact over Rs.200,000 cores of financial transactions on daily basis across networks and terrains, thus helping us manage the enterprise wide ICT setup and offering access to niche skills. We take great pleasure to mention that some of our large customers haven't experienced

41

downtime in the past 10 years. In fact we have set standards for the nation on uptime. Our dedication and sincerity is clearly visible through our delivery of services.

Products NSE.IT offers end-to-end Information Technology (IT) products, which provides complete IT solutions to Stock Exchanges, Clearing Corporations, Brokerage Firms, Insurance Firms and other organizations in the financial sector. In order to succeed in a fast-paced financial environment, companies have to economize their business operations and market their opportunities. We keep our product lines updated with the latest innovations in the trading and financial segments. Our end-to-end service and support across all products we deliver is an assurance of our total commitment to attend to your immediate stock trading needs. NSE.IT offers your business the opportunity to take advantage of our products to drive your business momentum with a strong trading system and financial environment. NSE.IT provides products in the following categories: Algo trading is most commonly used by large institutional investors due to the large amount of shares they purchase every day. Brokerage Solution is dedicated in providing easy administration facilities to Brokers. Exchange Simulator is a complete suite of trading system comprising of traders front end and matching engine. Exchange Solutions comprises of Xs Trade, which is a comprehensive Exchange solution enabling Exchanges to run their trading operations. Wealth Management services are provided with solutions like WealthKraft and Distribution of Financial Products (DFP). Insurance Solutions is provided by NSE.IT with its product PLANS, which is a comprehensive Process management System created for the Insurers.

Algo Trading
"Make wise transaction decisions with Algo Trading".

Algo trading or automated trading is based on technology-driven pre programmed mathematical model-based stock trading which is quite popular in developed nations and is expected to gain momentum over the next few years in India as well.

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At NSE.IT, the 100 per cent subsidiary of National Stock Exchange, we use trading softwares for stock brokers that will help them in formulating a trading strategy and its execution. The products used are exchange neutral keeping in mind the convenience of the stock brokers. Globally Algo trading is pegged at 3 per cent of the total turnover. What Does Algorithmic Trading Mean? A trading system utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased. Who uses Algo Trading? The use of algorithmic trading is most commonly used by large institutional investors due to the large amount of shares they purchase every day. Complex algorithms allow these investors to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs.

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Greeksoft
Started in 1997 as a software company providing complete software solutions to clients as per their requirements. We have obtained unique experience and built a very strong team of software developers and managers. Greeksoft is perhaps the only company in India which shunned the popular way of tapping the derivative market, that is by using cumbersome customized excel sheet or using high end, difficult to use and costlier rental based software products from international markets. Instead, we invested on an in house development with an easy to use product and a local support system, and that paid dividends. Greeksoft is the first in India to come out with derivatives risk management software solutions and online arbitrage opportunity finder. The products are a real hit in India. The feedback by users and our growth in the Indian markets testify to this success. Greeksoft is a complete business solution provider in Mumbai, India promoted by Mr. Ajit Hakani and Mr. Hitesh Hakani. The company engages high quality professionals managed by a good team leader to deal with big projects With its dominant strength in the area of software development, the company is all set to develop innovative technologies and software in the emerging markets in India and abroad. Products Categories: Automated Trading System Option Portfolio Management Online Market Information Software Risk Management Tools.

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Flextrade
Founded in 1996, FlexTrade Systems is the global leader in broker-neutral algorithmic trading platforms and execution systems for equities, foreign exchange and listed derivatives. A pioneer in the field, FlexTrade introduced the first trading system that allowed clients to control and customize their proprietary algorithms while maintaining the confidentiality of their trading strategies through a vendor-provided, broker-neutral platform. Change is the only constant in electronic trading. That's why FlexTrade is continuously upgrading its products and services and has recently introduced several new innovative trading, riskmanagement and analytical tools. All can be tailored to meet the demanding requirements of a global client base of more than a 150 buy- and sell-side firms, including many of the largest investment banks, hedge funds, asset managers, commodity trading advisors and institutional brokers. With offices in North America, Europe and Asia, FlexTrade maintains an experienced staff of over a 160 developers, programmers, strategists and product specialists, who work hand-in-hand with our clients' technologists and traders to break new ground in the field of electronic trading. To learn more about how FlexTrade's suite of innovative products and services can help you "Trade your best," visit our Solutions page or contact one of our product specialists. Solutions Multi-asset class solutions for buy- and sell-side trading institutions from the global pioneer in broker-neutral algorithmic trading. EMS
1 2 3

FlexTRADER FlexTRADER exp FlexDMA Mottai

Analytics FlexTQM FlexPTS FlexEdge OMS FlexOMS ColorPalette

45


5 6

Foreign Exchange FlexFX MaxxTrader Options FlexOPT FlexOPT-RM FlexOPT-OMM Derivix Futures FlexFutures

7 8

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CHAPTER 5
RESEARCH METHODOLOGY
5.1 Research Design Exploratory Research
As the term suggests, exploratory research is often conducted because a problem has not been clearly defined as yet, or its real scope is as yet unclear. It allows the researcher to familiarize him/herself with the problem or concept to be studied, and perhaps generate hypotheses (definition of hypothesis) to be tested. It is the initial research, before more conclusive research (definition of conclusive research) is undertaken. Exploratory research helps determine the best research design, data collection method and selection of subjects, and sometimes it even concludes that the problem does not exist! Another common reason for conducting exploratory research is to test concepts before they are put in the marketplace, always a very costly endeavor. In concept testing, consumers are provided either with a written concept or a prototype for a new, revised or repositioned product, service or strategy. In this study it is exploratory research because it is conduct first time in market by any company. And the information of that research is not available in any place and it is dream project of company and he conduct such type of research first time.

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5.2 SAMPLE DESIGN & PRIMARY DATA COLLECTION (Field Data Collection and Recording)
In this study it is totally based on primary data collection. Company provide the list of 150 companies name with address, the researcher visited individually in each office and collect the informations like desired features of Algorithmic Trading, companies name those providing Algorithmic Software etc.

Data Collection in field

Universe:- Universe is the total population from which the sample is drawn. For example, if you are sampling 500 houses from a city that has 10,000 houses, the universe here is the 10,000 houses. The largest entity to be described, of which the sample is a part. The universe can be finite or infinite. In finite universe, the number of items is certain but in case of an infinite universe the number of items is infinite i.e. we cant have any idea about the total number of items. In case of our research, the universe consists of all brokers. Population:- The theoretical aggregation of specified elements as defined for a given survey defined by time and space. It is the total collection of elements about which we wish to make some inferences. Population is also used to refer to a set of potential measurement or values including not only cases actually observed but those that are potentially observable. In case of our research, population will constitute those who are doing trading. Target Population: - The aggregation of the population from which the sample is actually drawn. The definition of the target population needs to be given in the report. This definition should include the geographical area (country, region, town, etc.) covered by the target population as well as the age group and gender. It is also important to specify the exclusion of any population subgroups, such as certain ethnic groups, non-citizens or those who do not speak some major languages of the country. In case of our research, target population will constitute those brokers who actually doing Arbitrage & Algorithmic Trading. Sample Frame:- A specific list that closely approximates all elements in the populationfrom this the researcher selects units to create the study sample. Sampling frame (synonyms: "sample frame", "survey frame") is the actual set of units from which a sample has been drawn: in the case of a simple random sample, all units from the sampling frame have an equal chance to be drawn and to occur in the sample. In our case our sample frame are customers/young customers. In case of our research, sample frame will consist of 150 brokers those are located in Delhi/NCR.

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5.3 SAMPLING TECHNIQUES

Non-Probability Sampling:Non-probability sampling represents a group of sampling techniques that help researchers to select units from a population that they are interested in studying. Collectively, these units form the sample that the researcher studies. A core characteristic of non-probability sampling techniques is that samples are selected based on the subjective judgment of the researcher, rather than random selection (i.e. probabilistic methods), which is the cornerstone of probability sampling techniques. Whilst some researchers may view non-probability sampling techniques as inferior to probability sampling techniques, there are strong theoretical and practical reasons for their use. This article discusses the principles of non-probability sampling and briefly sets out the types of non-probability sampling technique discussed in detail in other articles within this site. In this stdy company give us the list of 150 broking companies. Purposive Sampling:Purposive sampling, also known as judgmental, selective or subjective sampling, reflects a group of sampling techniques that rely on the judgment of the researcher when it comes to selecting the units (e.g. people, cases/organizations, events, pieces of data) that are to be studied. These purposive sampling techniques include maximum variation sampling, homogeneous sampling, and typical case sampling; extreme (or deviant) case sampling, total population sampling, and expert sampling. Each of these purposive sampling techniques has a specific goal, focusing on certain types of units, all for different reasons. The different purposive sampling techniques can either be used on their own or in combination with other purposive sampling techniques. Purposive sampling starts with a purpose in mind and the sample is thus selected to include people of interest and exclude those who do not suit the purpose. This method is popular with newspapers and magazines which want to make a particular point. This is also true for marketing researchers who are seeking support for their product. They typically start with people in the street, first approaching only 'likely suspects' and then starting with questions that reject people who do not suit. In this study we have also chosen Purposive Sampling technique, because we have large no. of brokering companies name and the list are already made by company to find out the how many broking companies doing Arbitrage & Algorithmic Trading and how much doing retail trading. Sample Size:Sample size relates to how many people to pick for the study. The eligibility of the person to the sample was defined at the time of survey. The individual selected to the original sample was eligible if he/she still lived in the survey area and was alive during the time of survey examination. Systematic sampling relies on arranging the target population according to some ordering scheme and then selecting elements at regular intervals through that ordered list. Sample Size:- 150 We conduct their survey in Delhi/NCR region.

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CHAPTER 6
RESULTS & DISCUSSION

Exhibit 6.1:- Proportion of Brokers using Algorithmic and Arbitrage Trading. In that there are 150 brokers are in Delhi/NCR in which 30 brokers are doing Arbitrage & Algorithmic Trading, it mean approx 18-20% brokers are doing Arbitrage & Algorithmic Trading in Delhi/NCR. The reason behind that is Algorithmic & Arbitrage trading required more knowledge about stock market and it is highly risky in comparison of normal trading. The profit margin is very high but if market not performing well the loss is also high. Algorithmic trading is a high-tech trading and the cost of Algorithmic software are very high and a normal broker he not purchase at that rate. So, there are very few brokers who pay that amount on high risk.

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Exhibit 6.2:-Market Share of Different Software Companies. In that pie chart we can see 40% market will be covered by OMNESYS, 30% market covered by FINANCIAL TECHNOLOGY, 15% & 15% market covered by GREEK & NSEIT respectively. The market share of OMNESYS is about 40% because it is the oldest company in Algorithmic trading in market and he provide many features for Algorithmic trading, its provide customization features to set strategies to own. The market share of FINANCIAL TECHNOLOGY is about 30% because it also the oldest IT company in market but the features of Algorithmic trading is not up to date but FINANCIAL TECHNOLOGY is the No.1 company for Trade Anywhere. The market share of GREEK is about 15% because it is new company in field of Algorithmic trading. The market share of NSEIT is about 15% because NSEIT provide free software but only those brokers who taking membership from that.

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Exhibit 6.3:-Estimated Algorithmic Trading Adoption Source: The US Electronic Trading Market 2010, Aite Group, November 2010

Exhibit 6.4:-Participation algorithms in use Source: THE TRADE Algorithmic Trading Survey, March 2011

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Algo trading in equities USA With about 50 trading venues exchanges, displayed Alternative Trading Systems and dark pools and relying on high-speed networks for effective implementation of the find best price obligations imposed by Regulation NMS, US markets are the worlds most competitive and most advanced. With the advantage also of a unified clearing network, complex trading strategies can readily be applied. It is very common (almost mandatory now) for market players to employ smart routing algorithms that take into account many parameters: discrepancy between venues in terms of latency, price, level of grayness of various dark pools, and the price maker/price taker model employed by many AT Ss. Upstream of the smart routers, execution algorithms are also widely used: Aite Group estimates that 60% of US equity market volumes in 2010 emanated from execution Algos [Exhibit 6.3], and this percentage is still growing steadily (a short-lived dip appeared in 2010 following the Flash Crash, but Algo trading is now on the rise again). Among the most popular algorithms in US equity markets are implementation shortfall and benchmark strategies (mainly VWAP and Participation) [Exhibit 6.4]. A substantial number of investors use liquidity seeking strategies across multiple dark pools, often launched from portfolio trading strategies. The high frequency trading (HFT) phenomenon is also most firmly established in the US equity markets. TABB Group has estimated (April 2011) that HFT accounts for some 54% of trades1 (with growth at last slowing). Clearly, the US equity market can be seen as an already largely algorithmic game. Algo trading in equities Europe In Europe, four years after the first MiFID Directive the clearing landscape is complex, with interoperability still only at an early stage of development. Trading costs have fallen, due to the competitive pressure placed on the incumbent exchanges by the new Multilateral Trading Facilities (MTFs), but clearing and market data costs remain high. One consequence is that high frequency trading is less prevalent than in the US, and there is also impact on the volume of algo trading (~35% of the market in 2011, as estimated by TABB Group.

53

Exhibit 6.5:-Shares Traded, by Execution Type Source: US Equity trading 2010: low touch trend, TABB Group, July 2010 Algo trading in equities Europe In Europe, four years after the first MiFID Directive the clearing landscape is complex, with interoperability still only at an early stage of development. Trading costs have fallen, due to the competitive pressure placed on the incumbent exchanges by the new Multilateral Trading Facilities (MTFs), but clearing and market data costs remain high. One consequence is that high frequency trading is less prevalent than in the US, and there is also impact on the volume of algo trading (~35% of the market in 2011, as estimated by TA BB Group [Exhibit 6.5]. But market structure has been changing quite rapidly, and continues to do so. The major MTFs have taken significant market shares, Chi-X being now the #1 European trading venue in terms of volume traded [Exhibit 6.6], and broker dark pools and crossing networks are also well established. A good smart routing strategy is therefore essential to achievement of true Best Execution, as required under the MiFID rules. Smart routing is still not used by all market players, however: many smaller brokers continue to trade only on the main exchanges i.e. using only one venue for each listed instrument. As competitive and regulatory pressure to deliver true Best Execution increases, this will promote the further growth of execution algos in general, and of smart routing in particular.

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Exhibit 6.6:-Major European Venues: Total Equities Volumes, January-June 2011 Source: SunGard- WFE- FESE

Algo trading in equities Asia-Pacific APAC is a complex world in itself. There are many markets and many currencies, and numerous exchanges, including those of Hong Kong and Singapore, still hold monopoly positions in their respective territories. Meanwhile, following the trend set earlier in the US and Europe, there is currently a high pace of growth for automated trading. All of this creates a challenging environment for market participants: new entrants must cope with multiple local regulations and trading practices, while the local players have to enhance their systems to compete with the Tier-1 firms that are growing their regional franchises. The relative immaturity of electronic markets in the APAC region means that misunderstandings about the definition of algorithmic trading are especially likely here. In some markets (China, India, and also Singapore, for instance) brokers and buy-side firms still ask Why would I need algorithms?. This has resulted in good opportunities across the region for the major Western brokerage firms, who brought in their algorithms to profit from market inefficiencies, and now offer those algos to local brokers, as well as to investors. The main challenge for these global

55

players resides in the variety of market specificities they have to handle: order types, trading hours, trading patterns, market regulations, and constant change in the landscape: Smart Order Routing in India became possible in 2010, alternative venues are on the rise in Japan and Australia, and financial derivatives markets are taking off in China. The level of adoption of algorithms varies widely across the region, as illustrated in the chart below from Celent [Exhibit 6.7]. Some locally based experts question these figures: the major part of Algo volume currently comes from global tier-1 brokers, with most local players trading still being manual. The survey sample may have been biased towards the tier-1 firms. According to the Singapore Exchange, algorithmic trading in 2010 accounted for some 25% of volume in derivatives, and only about 5% in the cash equity market.

Exhibit 6.7:-Levels of Algorithmic Trading in Asias Leading Markets Source: Electronic Trading in Asia-Pacific: A Market by Market Update, Celent, October 2010

6.1 Future of Algorithmic Trading

India has a competitive market for equities, futures and options, commodities, foreign exchange and currencies. But it was just two year ago that direct market access (DMA) to exchanges was allowed. Although official figures dont exist, the consensus opinion is that about 5% of volume in equities is traded algorithmically and between 15% and 25% in future and options. Indian market is the third largest market only beaten by the US and CHINA and the growth rate is still very high so we can assume that, algorithmic trading is going to be lot more popular in Indian financial market.

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CHAPTER 7
FINDINGS
During the course of the study, the researcher visited 150 brokers offices and found out some desired features of Algorithmic Trading. The following are the desired features: As jobbers play for small- small profit like 10 paisa or 5 paisa, so there should be something FUTURE TO FUTURE in which these jobbers could set the strategy to book this small profit and to avoid lose. Beside this in Arbitrage there should be some facilities in which we can do automatic sale or purchase in between 2 or more exchanges. It has different parameters for all exchanges like NSE, BSE, so we can set the strategy separately. Risk Management System (RMS) roots are missing in all Algo software. When we use RSM it slows the system and if we not use RSM it create a doubt in mind. Exchange set some guide line in Algo software in back office and he reduce the range of a broker. If we reduce these guidelines it gives us advantage. If we use RMS in front office it reduces the speed and in Algo speed is required. So, launch RMS but it should not affect the speed. Launch Algo Software in Linux operating software but not in windows. In India Market to make Algo Software more attractive and successful (as this is required by clients) there should be some option provided to client to put the logics by clients.

The following are the existing features of Algorithmic Trading: Risk free terminal:- All the arbitrage & Algo software are on a different architecture, where there is no limit check for Arbitrage/Algo order, so it reduces the latency (order processing time). Conversal-Reversal:- Conversion & Reversal Arbitrage is an options arbitrage strategy which takes advantage of discrepancies in the value of synthetic positions and their represented equal in order to return a risk-free profit. Conversion & Reversal Arbitrage takes advantage of dramatic breaches in Put Call Parity resulting in significant differences in the value of a synthetic position and the actual position that it represents. For example, when the value of a synthetic long stock is significantly different from the underlying stock itself, a Conversion / Reversal Arbitrage opportunity exists. Such opportunities are extremely rare in options trading, gets filled out and corrected quickly and may not result in enough profits to justify the commissions paid. That is why Conversion & Reversal Arbitrage remains the domain of professional options traders such as floor traders and market makers who need not pay broker commissions.

57

Synthetic positioning allows an open options trading position to be synthetically closed without selling the position itself. For example, a synthetic long stock can be synthetically closed by shorting a corresponding amount of the actual stock. Synthetically closed positions are no longer be subject to directional risk and serves to hedge against short term price swings. Very simply, a Conversion is when stock is being bought in order to synthetically close out a synthetic short stock position and a Reversal is when stock is being shorted in order to synthetically close out a synthetic long stock position. However, Conversion & Reversal do not necessarily apply only to synthetic long and short stocks. In fact, whenever a synthetically closed position involves a long stock, it is known as a Conversion and whenever it involves a short stock, it is known as a Reversal. For example, a synthetic call option consisting of a long put and a long stock can be synthetically closed by shorting a call option. This is referred to as a Conversion as the whole position involves a long stock. A synthetic put option consisting of a long call and short stock can be synthetically closed by shorting a put option. This is referred to as a Reversal as the position involves a short stock. Butterfly Strategy:- The Butterfly Spread is an advanced neutral option trading strategy which profits from stocks that are stagnant or trading within a very tight price range. A Butterfly Spread derived its name from the fact that it consists of 3 option trades at once, just like the 2 wings built on the body of a butterfly. This is an options trading strategy where a very large profit is realized if the stock is at or very near the middle strike price on expiration day. When implemented properly, the potential gain is higher than the potential loss, but both the potential gain and loss will be limited. Unlike many basic option trading strategies, you can put on a butterfly spread for a much lesser price than most other strategies due to the fact that one leg or "wing" of the position is a credit spread that offsets much of the price of the other leg or "wing". The Butterfly Spread differs from the Iron Butterfly Spread in that the iron butterfly spread consists of 4 stock options trades instead of just 3 with a larger potential profit and that executing an Iron Butterfly Spread results in a net credit whereas executing a Butterfly Spread results in a net debit. As Butterfly Spread is a complex option trading strategy comprising of a credit spread on one leg, most brokers will not allow beginner option traders to execute Butterfly Spreads. Only veteran traders with high trading levels are allowed to execute butterfly spreads. You need to check with your broker for the criteria needed to allow the trading of credit spreads or butterfly spreads. The Butterfly Spread belongs to the family of complex neutral option strategies, similar to

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the Condor Spread, Iron Butterfly Spread and Iron Condor Spread. Each of them has their own strengths and weaknesses. Here is a table explaining the differences: Table 7.1:- Different options in Butterfly Strategy
Condor Spread Debit/Credit Max Profit Max Loss Cost of Position Profitable Range Debit Low Highest High Wide Iron Condor Spread Credit High Higher NIL Widest Butterfly Spread Debit Higher High Low Narrow Iron Butterfly Spread Credit Highest Low NIL Wider

These comparisons are made with the same maximum and minimum strike prices and real values. As you can see from the table above, the entire above complex neutral option strategies comes with their own strengths and weaknesses. Option trading strategies are all about trade-offs. There are no single option trading strategy that has the best of all worlds.

Box: - In options trading, a box spread is a combination of positions that has a certain (i.e. riskless) payoff, considered to be simply "delta neutral interest rate position". For example, a bull spread constructed from calls (e.g. long a 50 call, short a 60 call) combined with a bear spread constructed from puts (e.g. long a 60 put, short a 50 put), has a constant payoff of the difference in exercise prices (e.g. 10). Under the noarbitrage assumption the net premium paid out to acquire this position should be equal to the present value of the payoff. They are often called "alligator spreads" because the commissions eat up all your profit due to the large number of trades required for most box spreads. The box-spread usually combines two pairs of options; and its name derives from the fact that the prices for these options form a rectangular box in two columns of a quotation. Note that box spreads also form a strategy in futures trading.

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CHAPTER 8
CONCLUSION
Algorithms are widely recognized as one of the fastest moving bandwagons in the capital markets. Employing rules-based strategies has enabled buy-side firms to increase productivity, lower commission costs and reduce implementation shortfall. Algorithmic trading cuts down transaction costs and allows investment managers to take control of their own trading processes. By breaking large orders into smaller chunks, buy-side institutions are able to disguise their orders and participate in a stocks trading volume across an entire day or for a few hours. More sophisticated algorithms allow buy-side firms to fine-tune the trading parameters in terms of start time, end time, and aggressiveness. In todays hyper-competitive, costconscious trading environment, being the first to innovate can give a broker a significant advantage over the competition both in capturing the order flow of early adopters and building a reputation as a thought leader. In this study, there is no hypothesis creation because it is exploratory research and company do fist time research on that topic and before no one company do that type of research in the market.

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LIMITATIONS OF THE STUDY

Although this research was carefully prepared, there are still some limitations and shortcomings . It is important to stress the exploratory nature of this study and its limitations. The following are limitations are:(i) The study only covers 1 country in the Delhi/NCR region, such that the results may not apply directly to all countries in this region of the world. The sample for the present study comprised of 150 Brokers of Trading. This sample is only a very small proportion of the entire population of retail brokers in the country. Therefore, research studies with much larger sample size would be required to ensure appropriate generalization of the findings of the study. (ii) The research team members and their respective institutions often had difficulty gathering some of the information necessary to conduct a comprehensive assessment of the trade facilitation situation and to estimate the cost of implementation of various trade facilitation measures, as some of the information may have been available only to selected Government agencies (or not at all). (iii) The limited time and financial resources available, the private sector surveys are of limited scale and scope, such that the survey results may not be fully representative of the views of the relevant private sector stakeholders in the countries studied. Overall, while the study is useful in gaining an understanding of the trade facilitation situation and the need and priorities of the private sector in a wide spectrum of countries in the Delhi/NCR region, it is clear that more detailed national level studies should be undertaken, if possible as an integral part of the implementation of a DION Global Solution agreement on product facilitation.

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REFERENCES
1. Archit Bansal, Kaushik Mishra & Anshul Pachouri : Algorithmic Trading (AT) Framework for Futuristic Intelligent Human Interaction with Small Investors on 30th July 2012. 2. Mr. Gourav Gupta & Umesh Nihalani (Manager Financial Sector Ratings, CRISIL Ratings) : Growing Interest In Algorithmic Trading Set To Change Competitive Dynamics InEquity Broking on 25th June 2012. 3. S K Rao (Senior Business Consultant with the Financial Services practice of TCS) : Algorithmic Trading: Pros and Cons on 30th July 2012. 4. SYBASE (September 2007) : Quantitative Algorithmic Trading on 16th July 2012. 5. Ashok Jogani and Kshama Fernandes : Arbitrage in India: past, present and future on 30th June 2012. 6. Benjamin Becar, Product Manager, Valdi Algorithms, SunGards global trading business : Algorithmic trading: a complex map on 30th July 2012. 7. Guy Debelle of the Reserve Bank of Australia (September 2011) : High-frequency trading in the foreign exchange market on 17th June 2012. 8. Alain Chaboud, Benjamin Chiquoine, Erik Hjalmarsson & Clara Vega ( June 13, 2011) : Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market on 30th July 2012. 9. Willard John Thomas Associates (August 2010) : Algorithmic Trading in India on 12th July 2012. 10. Pavitra Kumar, Michael Goldstein, and Frank Graves (February 2011) : Trading at the Speed of Light : The Impact of High-Frequency Trading on Market Performance, Regulatory Oversight, and Securities Litigation on 30th July 2012. 11. http://www.dionglobal.com/ - 30th July 2012 12. http://beta.bseindia.com/ - 2nd Aug 2012 13. http://www.nseindia.com/ - - 30th July 2012 14. http://www.rbi.gov.in/ - 30th July 2012 15. http://www.sebi.gov.in/sebiweb/ - 30th July 2012 16. http://www.karvy.com/v2/ - 30th July 2012

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17. http://www.omnesysindia.com/ - 30th July 2012 18. http://www.ftindia.com/ - 30th July 2012 19. http://www.nseit.com/ - 30th July 2012 20. http://greeksoft.co.in/index.aspx - 30th July 2012 21. http://www.flextrade.com/ - 30th July 2012

Annexure

VWAP When a bulk order is placed the algorithm breaks it into several smaller orders according to the historical data as computed to be optimum. Volume curves are generated which describe the objective buying. In case of intra-day buying if large fluctuations are observed then the curve is interpolated accordingly to reflect the current scenario. Orders are executed according to the volume curve as long as they are within the maximum order size supported by the algorithms. Once the limit is reached, trading stops. Hence brokers try to optimize the algorithm to increase the maximum trading limit. It is particularly useful when the trader is not able to gauge the current market trends.

TWAP This model is a special case of VWAP model. Here we assume that market position would be stable all through the day. The historical data that we take generates a flat volume curve. The bulk orders are simply broken on the basis of time. Generally there is a constant time gap between the orders placed. For example an order is placed every 20 minutes. Maximum order size constraints functions the same way as it does in VWAP. Here brokers need to adjust the time slices taking care that the order is completed.

MOC This algorithm is useful in the financial derivative markets and securities which are auction based. In general this algorithm is used when trading is to be started after a particular time. Like in the case of auction based trading, bids are accepted after the starting time only. It functions on the basis of a time trigger, Algorithm waits for the time trigger and starts functioning after that.

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