Algorithmic Trading

This article was originally published in Postnoon on August 24th, 2012


http://postnoon.com/2012/08/24/algorithmic-trading/67942

From time to time, Algorithmic Trading (AT) or High Frequency Trading (HFT) hits the headlines, mainly due to regulatory concerns. The main concerns of the regulators being transparency, fairness and systemic stability.

A couple of days back, they were back in the news as the Delhi Highcourt issued notices to the regulator, Securities Exchange Board of India (SEBI), the exchanges: NSE and BSE, the Finance Ministry and the RBI. The notices were sent as a result of the plea of Intermediaries and Investor Welfare Association, which has alleged that AT "discriminates between rich and influential brokers and common investors/retail investors and creates inequality and finally casts a deceptive data to common investors and retail investors while trading in shares and securities on online trading platforms of BSE and NSE".

Let's look at what is AT in today's article.

Definition

According to wikipedia, AT, also called automated trading, black-box trading, or algo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

A special class of algorithmic trading is (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.

Characteristics

• Very high speed of trading due to the use of high speed computers

• Use of algorithms to process data feeds and take decisions to buy and sell automatically

• Use of co-location services

Concerns

The International Organization of Securities Commissions (IOSCO), reported in July 2011 that AT also contributed to the flash crash of May 6th, 2010 in the US when the benchmark index, Dow Jones Industrial Average crashed and then quickly recovered.

In India too, in the last couple of years, there have been instances where the markets have lost a large amount of money in a very short span of time and then recovered quickly. Once such instance happened during the Muhurat Trading on Diwali day of 2011.

These events brought to light the highly correlated nature of trading strategies using AT. This means that the markets can quickly become one sided. AT also results in very high short term volatility which could be detrimental to retail, non algorithmic traders.

Pros

AT enhances the speed of information dissemination and its supporters claim that it helps in making the markets more efficient. Large and multiple trades can be processed and carried out quickly. Complicated strategies can be implemented through algorithms. 75% to 80% of total trades in US and UK can be attributed to AT.

These are also the very reasons why the Intermediaries and Investor Welfare Association has accused the regulators of being "silent spectators". AT gives unfair advantages to institutions or brokers who have of co-location facilities and high speed computer prowess which are not available to the common man or ordinary retail investors.

SEBI, exchanges and the Ministry clearly need to put some thought into the advantages of speed over fairness to all.

We object Mr. Chetan Bhagat

This article was originally published in rediff.com on August 22, 2012

http://www.rediff.com/getahead/slide-show/slide-show-1-specials-we-object-mr-chetan-bhagat/20120822.htm

Do the young Indians really just want a job and a girlfriend? Which India is Mr. Chetan Bhagat talking about?
Chetan Bhagat became an instant hit with the Indian youth with his first book, "Five Point Someone". The book took the youth through a journey of three engineering students at the prestigious Indian Institute of Technology, which every young Indian either related to or wanted to be able to relate to. It was easy to read and witty, but no literary masterpiece. His subsequent books, One night @ the call centre, The three mistakes of my life, and 2 States, too went on to become bestsellers but established Bhagat as a 'dud' in literary circles.

Bhagat's latest book, 'What young India wants' is a non-fiction, unlike his previous books, and an attempt by Bhagat to establish himself as a serious, thinking, author. The book title indicates that Bhagat is trying to capitalize on his popularity with the Indian youth. The book may go on to become a bestseller, but he has clearly chewed more than he can bite this time.
There are essays in the book which have nothing to do with the youth or the young India. They are plain criticisms of politicians, policies and processes. And we are all on board there. Even though some of the observations are a bit over the top. For example, comparison of cricket with opium or suggesting that Indians are 'suckers for power'!

However, he has got the pulse of the youth wrong in many place in the essays which are related to the title of the book, "what young India wants". And the biggest one in my opinion is that according to him Indians lack a good set of values and are a confused bunch of people.

Indians are definitely not confused and have solid set of values.

The young India I know wants to fulfill the aspirations of their parents. We want to bring home a boy or a girl whom our parents would approve of. We want to come home for Diwali, wherever in the world we might be. We want to take care of our parents in their old age and protect our children, always.

We believe in God. We know the right from the wrong. We know the difference between honesty and corruption. Sometimes we deviate from our values to survive. To survive the same processes and policies which Bhagat has so lucidly criticized in his book.

We are fighters who get to schools, colleges and offices, running behind buses, dangling through the door, because of inadequate frequencies and public transport. Would we ever reach the destination on time if we were to form a queue? Queue works when 10 or lower number of people board a bus with 10 empty seats. But if 20 people need to board a bus which is already full, it will not work. Have you seen Indians break queues in the developed countries?

The youth of the nation know that all service providers are bad. We stick to a service provider as long as we don't decide to change, on a bad morning, in frustration. But the change is not in anticipation of better service. Same goes for their votes. Bhagat suggests that change can be brought around if everyone decides to vote for honest politicians. Isn't that an oxymoron in India? There are no honest politicians to vote for. Whether it's one party or the other, they are all corrupt.

We look up to our corporate czars because they survived and found their way through this corrupt system. Even if they inherited, as against innovated, they stayed afloat. And the suggestion that Indian youth does not look up to innovators or entrepreneurs is a bizarre one. Narayana Murthy (Infosys), Kiran Mazumdar Shaw (Biocon), Sunil Bharti Mittal (Airtel), and many more, are all first generation entrepreneurs, and we look up to them!

In spite of the education system, Indians think (unlike what Bhagat suggests)! We think, therefore a significant percentage of the scientists, doctors and academicians in the US are Indians. The fact that they go to the US and invent or innovate, and not in India, is a reflection on India's processes and policies. Not on the quality of our brains.

And seriously, the comparison between opium and cricket, is inane by any stretch of imagination. Yes there was a controversy. The business part of it isn't transparent. There are glamorous people involved. But what does that have to do with the game? Indian's enjoy watching the game, the country has some world class players, they idolize some of them, how's that different from basketball in the US or Football in Brazil? And trust me Mr. Bhagat, no child in India thinks about or sees "cricket as yet another example of India's rich and powerful treating the country as their fiefdom".

Truly, there is only one thing wrong with India. Its politics and the politicians. That is the root cause of our socio-economic troubles. And all we want, as youth of the nation, is a country free from these corrupt politicians. There is no confusion about that!
Author: Chetan Bhagat
Title: What young India wants
Publisher: Rupa Publications India Pvt. Ltd.
Pages: 181

Plan Bond Purchases Well

This article was originally published in Postnoon on August 17th, 2012


http://postnoon.com/2012/08/17/plan-bond-purchases-well/66652

Srikanth was already waiting in the cafeteria when Prof. Nicky walked in for her morning cup of coffee.

Prof. Nicky: Good Morning Srikanth. What pulls you out of your bed at this time?

Srikanth: (Offended), well I am generally awake by this time. But today I am here to show you an sms and ask you about what it means.

Nicky: Alright, let me see the sms.

Srikanth: Here it is- "Shriram Transport Finance Corporation launches the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue closes on August 10, 2012. The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively".

Prof. I know that a bond is an instrument which allows one to invest in a company (corporate bond) or with the government (government bond), for a fixed period of time and with a fixed return. In the case of this sms, a corporate bond is being offered for a fixed period of either 3 years or 5 years and will give a return of 10.25 and 10.5 percent respectively. But I have a few more questions.

First, What is coupon rate? Is it same as return?

Nicky: Let me make a correction in your previous statement, related to your question. 10.25% and 10.5% are not returns. They are coupon rates. Coupon rate is the interest that the bond issuer pays on the face value of a bond.

Srikanth: Face Value?

Nicky: Face Value of the bond is the amount which is returned to the investors by the issuer when the Bond matures. The price or the market value of the bond may be different depending on the attractiveness and demand for the bond.

Let me explain. If the prevailing price of a similar bond, with same coupon rates, in the market is say Rs97. Nobody will be willing to pay more than Rs97 for another bond. Hence the company will have to sell their bond at a discount of 3% on the face value. On the other hand, if the other similar bonds in the market are being sold at Rs105, the company will not be willing to sell their bond at the face value of Rs100. So, they will sell their bond at a premium of 5% on the face value.

Now, if the bond is bought at the face value, and held till maturity, it will give us a return which is equal to the coupon rate. But, if it is bought at a price less than or more than the face value, we will incur a capital loss or gain on maturity. This results in our return from bonds being different from the coupon rate. In finance parlance, the return on a bond is known as yield.

Srikanth: But why will a bond price be Rs97 or Rs105?

Nicky: That's because, a bond need not be held till maturity. It can be traded in the market. Its transferrable. So a bond which is more in demand due to its higher coupon rate, its price increases. Whereas a bond which has a lower coupon rate, its price decreases.

Srikanth: Ah...Demand and Supply at work here too! Economics everywhere!

Nicky: Absolutely. No wonder it is known as the mother of all subjects!

Better Safe than Sorry

This article was originally published in Postnoon on August 11th, 2012

http://postnoon.com/2012/08/11/better-safe-than-sorry/65297

Prof. Nicky had not been to Laxmiamma's house since sometime and on her way to the campus, decided to stop by her house to relish her Irani chai and enquire about her well being. On her advice, Laxmiamma had opened a savings bank account and had also started saving through a recurring deposit. She was happy with this arrangement as it gave her peace of mind and assurance of safety for her money, as against the constant fear of theft when she kept it at home.

There was an agent at the bank who was advising her to invest her money in Systematic Investment Plans (SIP) rather than in a recurring deposit. So as soon as Prof. Nicky came in, after the pleasantries and having settled on the sofa with the chai, Laxmiamma asked him about SIPs.

Laxmiamma: This man at the bank says that SIPs give a much higher return when compared to the recurring deposit. What are SIPs? Is it true that they give more return? Why and how do they give more returns? Why did you ask me to put my money as deposits when SIPs give more return?

Prof. Nicky: Now, now...slow down amma! Let me answer your questions one by one.

What are SIPs

SIPs are instruments which allow you to invest in Mutual Funds on a periodic basis, as against a lump sum. SIPs are to mutual funds, what recurring deposits are to fixed deposits.

Performance of SIPs

When you put your money in a SIP, every month or every quarter, depending on your preference, the money is used to buy the units of mutual fund schemes. The units are bought at the price or the NAV of the fund on a specified date of that month/quarter. In this way, you get more units when the NAV is lower and lesser units when the NAV is higher. So it helps you average out the highs and the lows. This means that is helps reduce risk by spacing out your investments.

But, we cannot say that they will perform better than recurring deposits. Because the performance of the SIPs will depend on the performance of the fund in which you are putting your money. And the performance of the fund depends on where the fund put their money. If it is an equity fund, the performance of the fund will depend on the performance of the stocks in which the fund invested. So yes, they may give more returns than recurring deposits on some occasions and give lesser returns on the other.

Risk and risk taking ability

A person who can take the risk of either getting lesser returns or even losing a part of their principal, should invest in SIPs. They are less risky than investing directly in Mutual funds and even lesser risky that investing directly in the stock markets, yet, they are risky. On the other hand, recurring deposits are safe instruments, with practically no risk, unless the bank goes bankrupt.

Laxmiamma, you are too old to take risk. And you are not so rich that you can afford to lose your hard earned money. That's the reason I asked you to invest in recurring deposit rather than SIPs.

Laxmiamma: Ah...next time that agent bugs me, I can now tell him that I do not have the risk taking ability to buy SIPs. I wonder if he will understand it though (winks)! More chai?

The Village called the Globe

This article was originally published in Postnoon on August 4th, 2012

http://postnoon.com/2012/08/04/the-village-called-the-globe/63760

Pax Indica-India and the World of the 21st Century by Shashi Tharoor, hits the stores at a time when India is struggling with policy making at the domestic front. While our Prime Minister, Dr. Manmohan Singh is heard at International forums, he has been accused (and rightly so) of having lost his voice at home. In an environment which is mired with serious lapses in policy making at the home front, takers for a book on foreign policy may be few.

Having said that, there is no denying that if there is anyone suited to write a book on India’s role in shaping the world’s ‘dreams’, it has to be the former UN Under-Secretary general and the former external affairs minister of state, Shashi Tharoor.
The premise of the book is vasudhaiva kutumbakam and focuses on the relationship of India with the members of the world family, past, present and suggestions for the future. Continuing with his obsession with Pandit Jawahar Lal Nehru, the book starts with a reference to the “tryst with destiny” speech and goes on to establish the role that India has been playing on the ‘global stage’ since the Harappan civilization.

It goes on to give a detailed account of India’s diplomatic relations with Pakistan, China, US and UN, but just offers a glimpse of the relations with the other regional and neighbouring countries, which might go a long way in shaping the policies of an India of tomorrow.

The book lacks the wit and spontaneity of his early books like The Great Indian Novel or Show Business. But it gives a good insight into the foreign policy making process in the country. Heavily advocating the use of social media, Tharoor emphasises on the need for change in the ‘intellectual and institutional infrastructure for foreign policy making in India’.

Name: Pax Indica-India and the World of the 21st Century
Author: Shashi Tharoor
Pages: 449
Publisher: Penguin Books India

Use RTI Superhighway

This article was originally published in Postnoon on August 3rd, 2012 (Co-Author: Anuj Hetamsaria)


http://postnoon.com/2012/08/03/use-rti-superhighway/63511

The Right to Information Act (2005) became effective in October 2005 to empower every citizen to ask questions from the Government. This Act has given the Indian citizens the right to seek information and take copies of government documents on one hand and made the public officers accountable on the other.

The application may be submitted electronically or in a hard copy to the designated Public Information Officer (PIO). Every government department now has a PIO who is responsible to provide the information to any and every applicant.

The application should be accompanied with a payment of Rs10 towards processing charges for the Central Government Departments. The fees may vary from state to state for the departments at the state level. It can be paid in Cash, by a Demand Draft or by a Money Order. You must remember to take a receipt for the application fees paid.

Write or type the application in a clean, white sheet of paper. Frame the questions clearly with the intention for finding out reasons rather than accusing. For example, avoid using words like 'Why did you" and "How could you". Instead use words like "share the process followed" or "would like to know the manner in which...". There is no limit to the number of questions that can be asked. However, it is advisable to keep your list of questions short and queries precise.

The application must contain the name of the person asking for information, his/her signature and application fee details like DD or Cheque Numbers. The reason for seeking information need not be stated as any Indian citizen has the Right to Information.

The application may be rejected if the department is exempt from disclosure or if the disclosure infringes upon the privacy or copyright of a person other than the government.

The upper limit for providing the information is 30 days. However, it is only 48 hours in cases involving life or liberty of a person. It is 35 days if the application is given to the Assistant PIO and 40 days if the information concerns a third party from whom the department might need to get the information before responding to the RTI application. If the information is not provided within these time frames, it is deemed as a refusal to provide information.

One of the reasons for the success of RTI is that if the information is not provided within 30 days of application, it directly penalizes the concerned officer by deducting Rs 250 per day of delay up to a maximum of Rs 25,000 per application, from the salary. If wrong information is provided, a penalty up to Rs 25,000 can be imposed on the officer.

RTI is the right step to make the governance of the country more credible and transparent.

10 Steps to file I-T returns

This article was originally published in Postnoon on June 1st, 2012


http://postnoon.com/2012/07/27/10-steps-to-file-i-t-returns/61691

If you haven't yet filed your income tax returns, you can do it without much hassle at www.incometaxindiaefiling.gov.in. We will take you through the process of filing the income tax returns for a Salaried individual in this article. Once you are on this site, follow the following steps:

Step 1: Left hand corner, first tab says, Download. Click on AY2012-13 which will take you to a table describing the form that you need to use according to your income sources. For example, if you are a salaried person with only interest income apart from your salary, you can download the form ITR-1.

Step 2: Scroll down and download the relevant form on to your computer, that is ITR-1.

Step 3: The downloaded form is in excel format. Fill in the personal details. If you do not know the information about 'Income Tax Ward / Circle', it's okay to leave it blank. Or your Chartered Accountant from previous years may help you.

Step 4: Before going to the section on Income and Deductions, go to the next worksheet called 'TDS'. Fill in the details about the TDS on Salary and other income from Form 16 and Form 16A's. At this point, you must cross check the amounts that you have filled in with the Form 26AS. Form 26AS can also be obtained from the website mentioned above. You just need your PAN number to obtain it. Form 26AS is the statement of all taxes deposited to the Government under your PAN Number. If the amounts that you have filled in the form, exactly match with the Form 26AS, your tax return will sail through. But if they don't, sooner or later, the IT department will come back to you to explain the differences.

Step 5: Go back to the first worksheet and finish the section on Income and Deductions. For Salaried people, most of the items here can be filled in straight from the Form 16 that their employer would have given them. In case you did not give the details about your Life Insurance Policies or other deductible investments to your employer, you can include them here now.

Step 6: If you have made donations to approved institutions, fill in the fourth worksheet.

Step 7: Calculate your tax liability using the 'Calculate Tax' Tab on the right hand corner of the first sheet.

Step 8: Fill the third sheet according to the tax status. If you need to get a refund, you will need to give your bank account details. If you need to pay the tax, you can pay it using your online banking facility or by going to the bank. Obtain the BSR code and the challan details and fill it in Sheet 2.

Step 9: Using tabs on the right hand corner, validate all the four worksheets. If you want you may print the sheets for your records.

Step 10: Generate xml using the tab on the right hand corner of the first sheet, save it on to your computer and then upload it on the website under submit return/AY12-13.

You will get an ITR-V as acknowledgement of your returns filed. You will need to sign it and send it to Bangalore. The address is mentioned in the ITR-V itself.

There are instructions at every step. The income tax department has made it really easy for anyone to file their own returns. In fact, they have also started the facility of getting a Tax Return Preparer (TRP) to come to your house and guide you in the process or you can get help from them online or on the phone at 18001801961.