Almost to the day a decade ago, internet trading was launched, unleashing an equity

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revolution across the country and bringing in many more investors. The era of technology had finally arrived in stock markets. How has technology moved since then? What has it achieved?

For one, it has brought a more level playing field in an area where manipulation and corruption ruled for decades. It also took away the advantage big brokers had of the price differential that prevailed in regional exchanges and Bombay Stock Exchange — the main exchange till the arrival of National Stock Exchange (NSE) in mid-1990s — as the price quotes on the Press Trust of India’s stock scan service from these smaller exchanges used to be late by anywhere between 20 and 30 minutes.

Thanks to technology and the competition unleashed by NSE, stock trading is now more efficient and transparent. Investors from across the country can buy and sell stocks at the click of the mouse. But it took a while before internet trading caught on. “When we started internet trading, the mood was not very exciting as the general attitude was to wait and watch. Very soon the internet boom collapsed and there was a pause, generally,” recalls C J George, chairman and managing director of Geojit BNP Paribas Financial Services (then Geojit Securities), the first firm to launch internet broking in India.

Today, the two leading stock exchanges witness more than one crore trades every day in the cash segment alone. Almost 20 per cent deal directly on the internet. The transformation from outcry system to online system has helped in increasing global and local participation in the markets. It has also allowed entry of players such as Financial Technologies, Religare Technova Global (formerly Asian CERC) and NSE.IT, which provide electronic trading solutions to exchan­ges, brokers, Foreign Institutional Investors and various other market players.

“If one looks at the volumes and turnover of the exchanges — they have only multiplied over the years. It’s clear that technology has enabled reach, access and ease of use for the end users — traders and retail. These numbers will again move significantly higher over the next couple of years,” says Kershasp Carnac, country manager, Religare Tech­nova, the number two player after Financial Technologies in the electronic trading solutions market.

According to director, operations at Financial Technologies Paras Ajmera the open out-cry system had its own drawbacks – requiring huge commercial space for trading, low and mostly localised participation, paper documents, and verbal communications. Further, clearing and settlement took more than 25 days and transfer of paper documents was a cumbersome process. “All these issues were resolved with the advent of technology in form of centralised electronic trading. Computer screen based trading allowed a wider participation of the people in markets anonymously with a centralised computer based matching platform.

Regulatory framework is also setting the pace for the entry of newer technological platforms that are intended at helping retail investors. The Securities and Exchange Board of India (Sebi) now allows retail investors to bid for initial public offerings through a system called Applications Supported by Blocked Amount. The system allows retail investors to bid for shares and the money will remain in their accounts till allotment.

Given that the cost of setting up new exchanges are much lower, and that still a large portion of household savings are yet to be channelised to financial markets, there is scope for more players in the stock exchange business. “Technology has taken such a long leap since the last stock exchange came into being,” points out Joseph Massey, managing director and CEO of MCX-SX, which is set to start its equity market platform later this year. In currency futures, there is immense scope for improvement and new players, hopefully, would set new benchmarks, says K V Thomas, former president of Cochin Stock Exchange and director at Inter-connected Stock Exchange, promoted by 12 regional stock exchanges.

BSE, once known for its laidback and complacent approach, is also catching up with lost years. Asia’s oldest stock exchange has increased the speed of the broadcast, which allows brokers and investors now to get information at speed that is 4 to 5 times faster than the earlier one. “This allows faster decision making and better execution of orders,” says Ashish Chauhan, deputy CEO of BSE. The exchange recently launched a new front-end order routing system called Fastrade, which allows trading within the offices of brokers through internet.

Another technology which stock exchanges have introduced to benefit investors is ‘co-location’ facility. Co-location is when market participants locate their computer servers physically within metres of an exchange’s system to reduce milliseconds of the time it takes to execute a trade. As Indian investors wake up to the concept of high-speed trading, co-location is a boon. Speed is very important to the statistical arbitrage traders and ultra-high frequency hedge funds. The facility to allow exchange and participant servers side-by-side is said to reduce latency, the time delay in data being transmitted from the exchange server to that of the member broker. This also works well as the time taken for a member’s order to reach the exchange’s system is shortened.

“The first co-location facility provided by Netmagic (an IT provider) at BSE premises would help the broking community to host their servers for program trading near to our trading system,” says Madhu Kannan, managing director and CEO of the exchange. He adds that this facility would be exchange neutral, that means members could use the facility to place orders on multiple exchanges.

Similarly, NSE also has plans to offer co-location facilities to its members who can set up automated trading systems on the exchange’s premises for direct market access and algorithmic trading. Both NSE and BSE are also ready to launch mobile trading facility for its members once the regulator gives a green signal.

Narain of NSE expects mobile trading to be even more popular than the internet trading in India. “Looking at the mobile penetration in India, it is possible that mobile trading will become more popular than online trading,” Narain said. India is the world's fastest growing mobile phone market with more than 50 crore users. Compare this with the number of demat accounts — just 1.6 crore.

Indian stock exchanges are also allowing traders to use newer technologies like automated trading or algorithmic trading. Here trading calls are made by computer-driven strategies. This is also a huge area of growth for companies like FT and Religare Technova, where the market is estimated at about Rs 500 crore annually.

In the front-end alone there are three major product segments — retail market dealer terminals, internet-based trading products and institutional dealer desks. A study by Frost & Sullivan, a consultancy, estimated Financial Technologies to be having a 75-90 per cent market share in each of these segments, and the remaining 5-20 per cent of the market formed by players including Religare Technova and NSE.IT.

So, where does it go from here? Are we looking at tougher competition with the entry of newer technologies and newer stock exchanges?

Says Religare Technova’s Carnac: “New exchanges are welcome, as they provide competition to the existing ones and like in any business, competition is good for the players — to avoid complacency and for the customers — to have choices.” But he adds that new exchanges “will not necessarily provide more liquidity.”

From the point of view of a brokerage or an investor, has technology helped bring down costs? “Before the establishment of NSE, the transaction cost for a rural investor used to be around 5 per cent, if we include the many levels of sub-brokers till the time an order was finally executed on BSE,” says George of BNP Geojit.

The spurt in volumes after the introduction of screen based trading is the proof of success of technology. More importantly Indian market, according to World Bank, was competing with Russia for the last position in settlement efficiency during early nineties. “Almost 20 per cent of all purchases before the establishment of National Securities Depositories invariably ended up as bad-delivery which is not even known to the new generation of investors and employees of brokerage firms today,” he says. Markets have been truly empowered by technology.

(With inputs from Mehul Shah & Vyas Mohan in Mumbai and Kumar Shankar Roy in Kolkata)