HFT Watch | Top algo-firm takes a giant leap, ramps up cash market bets in mid, small caps

Many retail traders have been reducing their exposure to equity derivatives and taking to cash market trading.

HFT firms are growing in clout and how? Graviton Research Capital, among the top algorithm-based trading firms in the country, has stepped up its activity in mid and small stocks over the last few months, according to an analysis of NSE bulk deals data for FY24 so far by Moneycontrol. From Rs 1,300 crore gross monthly turnover in cash market trades in April 2023, Graviton has increased its turnover to Rs 27,000 crore in the current month so far.

Other algo trading firms HRTI, Citadel Securities, QE Securities and NK Securities Research too have stepped up their game in the cash market, but Graviton appears to be the clear leader of the pack going by the bulk deal disclosures.

Algo trading firms are also known as high frequency trading firms (HFTs) because they rapidly move in and out of positions, as high as thousands of times a day.

The increased activity in the cash market, particular in mid and small cap stocks, is out of character for the majority of the HFTs. These firms typically hunt for profits in stocks that are eligible for derivatives trading; capturing the spread between the spot and futures prices is a common strategy.

If the stocks are ineligible for derivatives trading, they must be highly liquid. That is crucial to the strategy of most HFTs because they move in and out of positions very quickly, and don’t hold positions overnight.

Market watchers say the trend of HFTs getting more active in the cash market could be driven by two factors. One, mid and small caps have outperformed large caps by a huge margin. This has drawn a lot of retail interest in these stocks and boosted liquidity.

Two, competition appears to be heating up in the equity futures and options segment, a mainstay for algo trading firms so far. Growth in options premium turnover has slowed considerably in FY24 because of multiple factors, including a high base. Also, seasoned derivatives market players say many retail traders have been reducing their exposure to equity derivatives and taking to cash market trading, diving up NSE’s average daily cash market turnover. (See chart).

Among foreign players, HRTI—the Indian arm of the US-based Hudson River Trading—has scaled up its cash bets significantly, as seen from the bulk deal disclosures. HRTI had a gross turnover of Rs 481 crore in April and was active in only two stocks. This month, it has run up a gross turnover of Rs 10,940 crore and has been active in 53 stocks.

But size does not necessarily mean big profits. While Graviton is a leader by mile when it comes to turnover, profitability has been erratic. The firm generated decent profits in September December, but logged losses in August and November. And numbers for the other months have not been great.

However, these figures are based purely on the trades disclosed to the NSE under bulk deal rules. The turnover and profit numbers can be very different after factoring in the trades that do not need to be reported to the stock exchange.

Profit numbers for other algo firms could not be calculated because the buy and sell quantities for the same stock vary. Many algo firms carry overnight positions, and there are no disclosures on what the firm earned on the sale of the residual shares.