The biggest threat these jobbers now face to their livelihood is technology. In June this year, the NSE said it would now allow “decision support tools/algorithms, wherein the orders may be placed for execution for two or more securities/contracts as the case may be in capital market and/or futures & options segment simultaneously.” In layman terms, it is the green signal for ‘program trading’ by institutional investors in the Indian market.Given that I'm writing such automated systems, I am probably partly responsible. But it's not just fund managers that can do this - even the jobbers can get programs to do this kind of thing from their desks. This means job losses for a lot of "manual" labour but a huge opportunity in discovering more mispriced opportunities using automated systems. The same jobber can move to a new and perhaps less risky business model.This clearance is linked to the stock market regulator, SEBI’s approval for Direct Market Access (DMA), which allows institutional clients to place their orders on the exchange trading system through the broker’s infrastructure, without manual intervention by the broker.
A fund manager sitting in Hong Kong or Singapore can feed a program into the trading system, specifying the conditions under which the trade has to be executed. Once program trading takes off in a big way, Rambabu and other arbitrageurs like him will be fighting emotionless software programs for their daily bread.
And the battle will be one-sided. A software code can analyse thousands of scrips simultaneously and zoom in on arbitrage opportunities much faster than the jobbers manning trading terminals. Having spotted the break, the software will execute the trade in a fraction of a second before the arbitrageur can even react.
Unfortunately many will not be able to do so - we are all resistant to change. Even those of us who develop systems will see them die much faster as DMA takes over. But the point is to keep changing, and to keep improving. Just like any other industry, I guess.
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>Hi Deepak,
Can I assume that returns from Arbitrage Funds(launched by MFs) are going to be higher upon using these tools making them a more attractive investment?
Thanks,
Raj
08.05.08 at 2:24 PM
>I would hope so but not quite sure if the funds are using the best tools. But given more players will walk into this zone, we aren’t likely to see margins increase (rather, they are likely to decrease)
08.05.08 at 3:25 PM