Digitization of the stock trading industry in India has not only taken giant strides over the last few years but is also here to stay.
The National Stock Exchange of India (NSE) is ranked third globally for Stock & Index Futures and Options. This has been largely due to the state-of-the-art technology deployed by the exchange and this makes it the leading Indian exchange platform. The following technology advancements adopted by the NSE illustrate the point:
NEAT: NSE’s core trading system is called National Exchange for Automated Trading, NEAT for short. It operates on a client server-based application. Its uptime record is over 99 per cent with a single-digit millisecond latency level for any order entered into it. It is equipped for constant capacity enhancement in order to meet increasing user requirements as also additional trading loads. The other distinguished features of NEAT include:
- Servers that are fault tolerant for applications pertaining to core trading.
- A multi-layered trading system with unlimited scalability with each layer being enabled to accept more hardware. This has met the perpetually growing need for trading capacity adequately. The system uses an in-memory database. The response time of the matching engine is measurable in a millisecond as the system processes huge amount of transactions per second. It also generates and distributes market data at extremely high refresh frequencies and is accessible to all traders simultaneously.
- NSE has a Trader Workstation (TWS) with 2 Front-ends – NEAT PLUS & NEAT to cater to all market segments. It publishes a protocol usable by independent vendors of software as also Sell Side companies that intend developing their personal in-house systems.
- Algorithmic trading and Direct Market Access (DMA) have also been in vogue since 2008. DMA enhanced the possibilities for international financial institutions to access Indian markets faster. The current trend is to consume liquidity and also increase capacities in all markets. Thus enhanced algorithms with mathematics-based strategies that help consume liquidity and low-latency, faster systems are being required more. This is achievable by operating a co-location mechanism which the NSE has since 2010.
- The NSE was also the first to start the Tick-by-Tick system for market data which enables rack space to be rented along with low-latency connectivity, customary power supply, security and cooling facilities. Recently, the data solution — Thomson Reuters’s Elektron– has been enabled for delivering high-speed connectivity for all NSE data.
- Another distinguished feature is a connectivity software, TAP or Trading Access Point. This is compatible with the FIX or Financial Information Exchange, IM or Industry-Standard Messaging Protocols for the Derivatives, Equity & Currency markets.
- NOW – Also called NSE on Web is a new initiative to provide low time and cost options for market deployment for all NSE members. NOW is almost a nil cost cloud paradigm trading option. The NOW cloud enables connectivity to the NSE’s Derivatives, Equity and Currency Derivatives as also all mutual funds.
- The NSE’s risk management facilities monitor the capital adequacy needs of its members, their performance & track records, margin requirements, capital-based position limits and also automatically disables a member from trading when he breaches limits. This is based on Value-at-Risk (VaR) Methodology and is used by the equity section for risk management.
- The derivative segment, on the other hand, uses SPAN or Standard Portfolio Analysis of Risk, an extremely sophisticated methodology based on value-at-risk and which calculates margin requirements and/or performance bonds through analysis of “what-if’” situations of all market scenarios.
- For enhancement of liquidity, the NSE introduced the concept of Cross Margining in the year 2008. This is available across the F&O and Cash segments where client positions in both segments offsets each other. It takes into account clients positions in both segments with the cross margin benefit being grossed over all involved clients and is subsequently given away to the concerned member.
The BSE similarly, has also changed over to electronic trading from open floor trading since 1995. The whole process took just 50 days to be implemented. BSE’s system is called BOLT or BSE On-Line Trading and is a screen-based platform for stock trading. BSE is also equipped suitably to handle trading by smartphones ever since their advent in 2010.
According to published figures, currently around one per cent of total trading is generated from mobile websites or apps and is most likely to shoot to four per cent in the near future paving the way for more digital inclusion and stock market participation from retail investors.
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