Role played by technology in Futures and Options

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When futures and options were first introduced first in 2001, it failed to take off in a big way. It was only from 2004 onwards that the volumes in F&O starting picking up. But the thrust came a few years later when SEBI changed the definition of volumes in options to the premium value rather than the notional value. This gave a big boost to options volumes and index options continued to account for more than 80% of daily volumes on the stock markets. But the big boost for F&O actually came from technology. Let us look at the 6 aspects of technology that gave a boost to F&O in India.

 

  • Seamless connectivity between banking and broking

 

When it comes to futures and options, demat account is not important as these are contracts and just stay in the trading account. Of course, there are hedgers and call sellers, who need demat account but what matters is the seamless link between trading and banking. Thanks to online banking linkages, NEFT, RTGS, payment gateways and now UPI; it is possible to shift money at short notice and fund the trading account. Also, the process has been fine tuned in such a way that debits happen on the same day and any credits are available the next day. In fact, with the rise of UPI transactions, we could see the traditional banking advantage waning and even discount brokers and platforms could have a much better chance of offering an enticing F&O product to traders.

 

  • Call to action through the research route

 

This was a major research facilitator. Thanks to improved bandwidth and better processing facilities as well s the rise of cloud computing, it is possible even for smaller brokers to give a seamless call to action to their traders. A Call to action means that a trader can read the calls report, research the stock technicals, analyse the F&O data and place a trade from the same place. This has also come as a major technological boost to F&O. This improved computing and better bandwidth has also helped brokers to offer more enticing hybrid strategies which have also brought in the risk average traders also into the F&O market.

 

  • End-to-end trade, settlement and clearing process

 

Today the entire F&O trade and settlement process is done on a real time basis. From the time you put in your F&O trade to the determination of obligations on a net basis at the end of the day to T+1 settlement the credits and debits to the bank account; they all happen in once single chain. This straight processing has helped brokers build F&O volumes as margins are released faster and traders are able to churn money more effectively and efficiently.

 

  • The advent of algorithmic trading in F&O

 

Algorithms are computerized programs that can execute routine transactions and conditional transactions at a much greater speed and with almost zero errors in case of F&O. It is manually impossible to compete with these high end machines that run sophisticated algorithms. These algorithms start from the most elementary slice orders and go all the way up to conditional option orders and market making. This does mean a sharp increase in the order/execution ratio but that is the risk that any market takes in algorithmic trading. Most of the institutional trades and proprietary trades are done purely through the algorithmic mechanism and brokers are today able to run their broking desks with a more efficient investment in technology.

 

  • The rise of low latency trading

 

This has been a slightly controversial area as it creates a slight advantage for institutional traders compared to retail and individual traders. In low latency trading, the trader or the institutional puts the server at the exchange itself. This enables them to get a micro-second advantage in prices as prices will come into the other trading terminals with a microsecond delay. This microsecond advantage has enabled these institutions with low latency facilities to get an advantage in placing trades. Of course, the execution still deploys the algorithmic logic but the price advantage of that one microsecond is offered by the servers kept at the exchange premises. Low latency trading has been a major game changer for markets across the world, including India.

 

  • Futures and options simulation

 

Thanks to technology, you have the facility of simulating situations. This is very useful when you need to execute hybrid F&O strategies. In these situations, the simulator allows you to hypothetically look at the impact of any price movement on the payoff of the option strategy. Again, F&O simulation has been made possible due to quicker bandwidth and better computing resources. This helps traders to take more informed decisions.

What we have seen as the impact of technology on F&O is still a small part. When we have more brokers making use of artificial intelligence and machine learning more meaningfully, that is when the real potential of using technology in F&O will be seen!

 

For more information visit Angel Broking Limited website.

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