Algo trading firms rake in big bucks; Graviton top dog with Rs 3,500-cr revenue

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Leading algorithm-based trading firms—algo firms—continued to consolidate their grip on the market in financial year 2022-23, growing their revenues 70-100 percent. These players, also known in market parlance as quant firms, use complex algorithms and powerful computers to execute trades. While they use multiple strategies, a key one is to execute trades at lightning speeds for tiny profit margins, which when done repeatedly adds up to a substantial sum. This has earned them yet another moniker—high frequency trading firms (HFTs).

Numbers collated from annual reports by Moneycontrol show Gurugram-based Graviton Capital Research as the leader of the pack. The firm, founded in 2014 by IIT Delhi alumni Ankit Gupta and Nishil Gupta logged revenues of Rs 3,525 crore and a net profit of Rs 605 crore. In the last three years, the firm has managed to nearly triple its revenues.

The other big players the algo trading space are Gurugram-based QE Securities (part of the Quadeye group founded by Sudeep Gupta), Mumbai-based Alphagrep Securities founded by Mohit Mutreja and Prashant Mittal, NK Securities Research, founded by Faraz Khan and Sudhanshu Narang and the Indian arms of international trading powerhouses like Jump Trading, Citadel Securities, Hudson River Trading and Tower Capital.

These companies engage in proprietary trading, conducting transactions exclusively for their own portfolios rather than on behalf of clients. Even in instances where they execute trades for clients, the proportion of such business is inconsequential.

The rapid growth in revenues comes during a year when benchmark indices Sensex were flat to slightly down. This goes to show that algo firms’ strategies are able to generate profits irrespective of the broader trend in the market.

Hefty payouts

The bottomlines of algo firms show a mixed trend. However, revenues are a better indicator of how profitable a firm is and how effective its strategies are. One, the revenues reflect what the firm earned between purchasing and selling (or the other way round) securities. Two, the firms usually have generous profit sharing arrangement with their employees/associates or holding company,

For instance, Jump Trading Financial India has seen the fastest growth in revenues over the last three years. And while FY23 revenues grew 100 percent year-on-year, net profit declined 48 percent. While the break up of numbers for FY23 was not available, the firm has transferred around 75 percent of its revenues to holding company Jump Operations.

Graviton paid out Rs 404 crore in salary in FY23, an increase of Rs 162 crore (67 percent) over the previous year. That partly explains the marginal decline in net profit year-on-year despite a 40 percent increase in revenues.

Alphagrep’s salary and bonuses added up to Rs 411 crore, up Rs 169 crore (70 percent) year-on-year.

Shift in strategy?

While revenues have risen sharply in FY23, talk in the market is that the quant trading space has gotten hyper competitive of late, with hitherto unknown domestic players stepping up their activity. Till last year, algo firms were predominantly active in the futures and options segment, and one would rarely see their names in cash market deals. But over the last six months, algo firms name are regularly figuring in the bulk deal disclosures for stocks. What has also puzzled many in the market is that algo firm have become very active in illiquid stocks.

A major reason could that growth in equity options turnover is slowing. Between FY21 and FY23, index options turnover rose fourfold and contributed majorly to the earnings of HFT firms. In FY24 so far, average monthly turnover in index options on the NSE is Rs 10.9 trillion, just 20 percent higher than the monthly average of Rs 9.1 trillion last year. Growth in average monthly turnover stock options has been slightly better at 23 percent year-on-year, but it is only 10 percent higher than the average for FY22. At the current run rate, index futures turnover for FY24 will be down year-on-year and stock futures turnover will only be a small improvement over last year.

Given a combination of increased competition and slowing growth in the once fast-growing options market, it will be interesting to see if algo firms are able to maintain the scorching pace of growth in FY24.

For a more detailed read on the inner workings of high frequency trading firms, click link below:

Rise of the machines: HFTs tighten grip, make a killing on the Street as F&O volumes explode