Mobile trading and Smart Order Routing approved in India
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28 August 2010Anshuman Jaswal
The Indian capital market regulator, Securities and Exchange Board of India (SEBI), has finally approved two different but equally important means of access to the stock markets. Both mobile trading and smart order routing have been approved by SEBI. Mobile trading was being eagerly expected in the retail markets. India has a mobile phone user base of 645 million people, compared to only around 11 million demat account holders. As mobile connectivity is available to a far greater proportion of the population as compared to internet connectivity, industry participants believe that it could lead to a boom in stock market participation. While the brokerages that wish to provide this facility would have to ensure that they provide secure access, encryption and security, we believe that the infrastructure provision would not be the difficult element if mobile trading has to succeed in India. Globally, mobile trading is successful in markets such as Korea where people are very comfortable in using this medium. But in many other leading markets, mobile trading has not really taken off as people do not feel comfortable accessing the amount of information required to come to a decision about buying and selling a stock. So in the end successful adoption will come down to a trade-off between how comfortable mobile trading is as a medium of access and how important it is for the target investor to access the market through his/her mobile. Even though internet connectivity is not available to many Indians, physical access to brokerages still exists in most far flung Indian towns but we still have only 11 million stock market investors. Hence, the Indian brokerages have to ensure they put in sufficient effort to target the latent demand for stock trading in the population. If this does not happen, we could end up with a situation that exists in western markets where only a small proportion of the investors are interested in using mobile trading. While Smart Order Routing (SOR) is a different technology targeting a different segment of the market, a similar word of caution would be in order. The brokerages that want to provide the facility have to comply with a number of regulations. They will have to apply to the respective stock exchanges (mainly NSE and BSE). The exchanges have to communicate their decision to brokers within 30 days. Brokers will also have to submit a third-party system audit of its smart order routing system and software, beside providing an undertaking that the new system will route orders in a neutral manner. They have to provide an alternative mode of trading system in case of failure, besides maintaining logs to facilitate an audit trail. Furthermore, the broker server that would route orders will have to be located in India. So there is a lot of infrastructure that has to be put in place before brokerages can begin to offer the service. Besides, there is still a lack of comfort with the use of the technology in the leading exchange, NSE. Its position as the market leader could possibly be threatened, especially once MCX-SX, the exchange promoted by Financial Technologies, comes online. While SORs could help increase liquidity and encourage algorithmic trading the inability, at times, of the exchanges to cope with high volumes during peak hours could be a barrier to their widespread adoption. As in the case of mobile trading, there are a number of factors beyond the technology itself that will be at play in the next few months and years. So while we are certainly looking forward to the desired success of both mobile trading and smart order routing in India, a lot of effort would be required on part of the brokerages, and also the exchanges, to make this happen. With the large size of the stock markets and the mobile subscriber base, it is easy to think that both these technologies will succeed, but that is not something we can take for granted.
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