Infrastructure

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Arin Ray and and Sreekrishna Sankar
Arin Ray and and Sreekrishna Sankar
Commentary
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Technology Adoption Brings Change to Indian Capital Markets

While foreign brokers have influenced the adoption of high-touch DMA and the FIX protocol in India, Celent analysts say fully automated DMA remains a distant pipe dream as regulators are skeptical.

India has been an early adopter of the various technological changes occurring in the capital markets. One of the main reasons for this has been that economic liberalization and strengthening of the capital markets coincided with technological innovations in the markets worldwide.

DMA: A Difficult Beginning but Good Prospects Direct market access was introduced in India in April 2008, making India one of the earliest emerging Asian markets to adopt DMA. There are few reasons for adoption (in terms of number of brokers offering DMA service) of DMA, namely: highly electronic market, advanced trading infrastructure with trading in dematerialized form of securities and a central counterparty with straight-through-processing (STP), improvement in the execution quality and greater buy side control over trades.

While the advantages of DMA are there for all to see, the launch of DMA coincided with the crisis, and this impacted adoption. The timing could not have been worse — brokerages and institutional equity firms cut down on their IT investments. But the takeoff, albeit late, is happening in 2010.

The potential market for DMA providers and users is large—it consists of over 1,000 brokerage firms and around 1,350 domestic and foreign financial institutions. The foreign brokerages, which already possess the technological capabilities and know-how, are bringing a sea change in terms of the technology adoption among the domestic brokerages. In an already fragmented brokerage market, any technique to increase market share is embraced. To gain market share, even from foreign investors, domestic brokerages are driving technology adoption, with top players having already adopted DMA.

In India DMA remains high-touch, mainly due to regulatory requirements and constraints. However, even this manually intrusive DMA has reduced manpower and costs, and the brokerages are starting to appreciate this efficiency improvement. A fully automated DMA stands as a distant dream, with the regulator not yet fully convinced about the implications of such a system.

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