The Impact of DMA in India

The introduction of DMA trading for institutional investors in India reflects the nation's move towards a technologically advanced and efficient electronic trading infrastructure. Celent anticipates high adoption of DMA channels among industry participants and high growth of DMA flows over the next few years.

The Indian capital market has undergone a series of transformations starting from the early 1990s. The changes have touched all aspects of the market, including the regulatory environment, adoption of technology, increased global and local participation, an expanded portfolio of asset classes, better market transparency, and quality of execution.

In the latest move, the Securities and Exchange Board of India (SEBI) introduced Direct Market Access (DMA) for institutional trading in April 2008, making India one of the earliest among the Asian emerging markets to adopt DMA. With this, the local capital market moves a step further towards having a modern and technologically efficient trading infrastructure that compares with global standards.

Drivers for Adoption

Greater control, faster execution and error reduction will be the primary drivers of DMA adoption in India. Front running of orders and high latency of execution are serious issues in the market today. Buy side firms in India described the frequency of front running in India as "moderate." DMA can curtail front running since the clients can now place their order directly on the market.

Also, the time taken between a trade order by end customers of the buy side firms and its actual fulfillment can sometimes be as high as one to two days. In addition, errors in order fulfillment are also known to occur. Celent estimates that three to four errors per month for a client are common. The institutional buy side believes in DMA technology's ability to solve these issues.

High Enthusiasm

The buy side market in India constitutes over 1,350 foreign and domestic firms. Enthusiasm for DMA is high among the active participants in the market (consisting of about 50 foreign institutional investors and a similar number of domestic institutions). Celent estimates that over 80 domestic and foreign buy side firms will use DMA channels by 2009"2010.

Although India has over 1,000 brokerage firms, only 60 " 70 brokerage firms cater to the institutional segment. The Indian brokerage market is a fragmented market that is characterized by high competition - no single firm has more than 7-8% market share. In this context of high competition and the buy sides' (initial) preference for DMA, the brokerage firms believe that offering DMA services will be necessary to retain clients/grow market share.

Also, foreign institutions own stakes in some of the major Indian brokerage firms and the mandate to provide a DMA trading channel comes partly from their foreign owners. Celent estimates that 40"50 brokerage houses, including most of the top 10, will offer DMA services by 2009"2010. Mostly local technology vendors are catering to this market at present.

Potential Impact

The basic brokerage fees for institutional trades in India range from 10 to 40 basis points, depending on the size of trade and range of execution services offered. As with the markets in the developed world, brokerage fee for DMA flows is expected to be lower.

By the end of 2008, DMA fees are expected to drop to 10"20 basis points. Also, a vast majority of the brokers will provide only basic order type DMA services in the initial period. Only a handful are expected to provide advanced services such as broker algorithms and smart routing initially.

While a few market players have already started trading on DMA channels, the vast majority of the providers and clients are in the process of upgrading their electronic trading systems and awaiting certification from SEBI/exchanges. Significant DMA volumes will commence only by Oct-Nov '08. Celent estimates that clients are likely to trade between 20% and 30% of their qualifying volumes through DMA channels initially. This will amount to an estimated 11% of the total market volume by 2010.

Sandeep Hebbar is a senior analyst with Celent's Banking group and is based in Bangalore.