Fight or Flight for Indian Broking
Images: Vikas Khot
Big Fish, Fresh Prey (l-r) Morgan Stanley’s Parag Gude, IIFL’s R. Venkatraman and Motilal Oswal are all working out ways to adapt to the rapidly changing market dynamics
…Still the Foreigners are Coming
At a time when most Indian broking outfits are struggling to come to terms with a rapidly changing industry, at least three foreign brokers want to set up shop in India. Jefferies, a US-based securities and investment banking company; Barclays, which has a presence in India through consumer banking and corporate advisory, and Standard Chartered are some of the names that will enter the Indian market next year.
They feel that India and China are the only two markets that have the capacity to increase volumes dramatically in the long run. So every foreign player with an Asian presence wants to open its account in India. And why won’t it? Over the past five years the turnover in the cash market has gone up by an average 18 percent each year, while the derivatives markets have risen 43 percent.
Interestingly, even among the foreign broking firms, only Credit Suisse, Macquarie Securities, Morgan Stanley and CLSA have succeeded in the Indian markets. They account for almost 50 percent of the institutional market.
IIFL (India Infoline), Kotak Mahindra, Motilal Oswal, IDFC and Edelweiss are the major Indian broking firms. Though the global players have been dominating the sector in India for almost 10 years, there is palpable fear now among the Indians players that the foreign ones could raise
their game further and take over the entire market.
In fact, many saw the writing on the wall when industry veteran Vallabh Bhansali quietly sold off the investment banking, institutional broking and corporate advisory services of Enam to Axis Bank for Rs. 2,067 crore in November last year. Bhansali’s timing was perfect. Experts say that had the deal been postponed by even six months, he would have lost heavily on valuation.
Others are not as lucky. “If the market continues to be in the present state for one more year, then the broking industry will face difficulties. Only the top few brokers who have the balance sheet and ability to adapt to a continuously changing environment will survive. Challenging times will force the industry to consolidate in the future,” says R. Venkatraman, managing director of IIFL. In 2007, IIFL pulled off a coup by poaching Bharat Parajia and four of his colleagues from CLSA, a leading foreign broker, with fat bonuses worth Rs. 11 crore. But things have changed now.
The foreign brokerages want to hire fewer people and invest more in technology. Most of them have been working on their technology for almost a decade and have acquired a level of expertise that their Indian counterparts can now only dream of. So what is this technology that is so deadly to the health of Indian broking firms?
To DMA or Not to DMA
Currently, algorithmic trading that uses computers accounts for around 10 percent of the entire Indian market. This is much lower than the 70 percent for the US, Singapore and Hong Kong markets. More and more people are taking up Direct Market Access, or DMA, which allows institutional players to enter markets seamlessly without broker intervention.
US-based Progress Software is sure that technology will be the game changer in financial markets and is betting big on India. Giles Nelson, who is building the algorithm for Apama — one of Progress Software’s key products — believes technology can be the great leveler. If bigger firms are caught sleeping on innovations, the smaller ones can easily scale up if they have a smart algorithm. In the past year, Progress Software managed to get five clients, mostly propriety traders, in India. Globally, it has about 150 clients.
When it comes to technology, Indian markets are much more demanding than other Asian markets and require substantial investment. Most of the order flow is through one touch DMA, which is technologically more complex than straight DMA. This is not expected to change anytime soon. Also, there are very few institutions that have completely moved on to seamless DMA. Even those that have the technology use it only for 30 percent of the trades because the Indian markets are largely illiquid.
- Despite short-term pain, India Inc stays future positive
- Sell Your Vision to Customers
- Credit Suisse: Microfinance is Not Charity It's an Investment
- 'India Can Translate Optimism Into Real Growth': Chetan Ahya, Morgan Stanle...
- IIFL And Its New Businesses