What is the size of Indian HFT Market?
This article explores the historical growth of HFT in Indian markets. The article also lists down key players, profitability and revenues of the top HFT players in India. This article also studies the difference between Arbitrage and HFT players in India.
Around 50% of the trading volume in NSE is contributed by algorithmic (algo) trading. HFT is a subset of algo trading where the trades are of small quantity, at very high frequency and the positions are squared up rapidly. In HFT, traders take lowest risk by keeping lowest possible open positions.
A study of high frequency trading in India showed that on an average high frequency trading (HFT) makes two basis points per trade. Due to STT and other transaction charges the gross profit after transaction cost reduces to 0.5 basis points. The average volume per day in India in F&O market was roughly Rs. 40,000 cr.
Various studies show HFT accounted for 10–30% of trading volume during 2010–15. So picking a median number of 20% HFT accounted for around Rs.8,000 cr of volume daily between 2010–15. This amount of trading would amount to not more than Rs.50,00,000 of average daily profit by all HFT traders together. It is estimated by market players that 80% of this profit was captured by three big HFT firms in India- Shastra (a subsidiary of Tower research), Alpha grep (a subsidiary of way to wealth), and Quadeye. Around 20% of this profit was distributed among 8–10 Indian semi-automated HFT firms.
Market players also say that Semi-automated arbitrage firms like OPG, IKM, Pace Securities, and Adroit together accounted for maximum of Rs. 10,00,00 average daily profit. These numbers can be easily validated.
ISB in its study on HFT for SEBI did exactly that and found the numbers to be in a similar ballpark. The total size of Indian HFT market between 2010–15 was about Rs.100 crores annually. HFT algorithms search for the smallest of price inefficiencies in the market and exploit them to make a profit, in the process bringing inefficient prices closer. Arbitrage across the two main exchanges is one of the opportunities where price differences in the two markets can be taken advantage of by a HFT algorithm . Of the Rs.100 crore HFT market, total size of the arbitrage market was likely to be around Rs. 20 cr annually, the market players believe.
Next, I will write about co-location.
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