High frequency firms see India profits surge despite regulatory curbs

(Bloomberg) — High-frequency trading firms posted strong profit growth in India despite regulatory restrictions, demonstrating their agility to capitalize on opportunities in the country’s $5.4 trillion equity market.

Hudson River Trading LLC led the way with a 156% increase in profits for the fiscal year ended March 31, according to filings. Optiver Holding BV and domestic firms AlphaGrep Securities Pvt and Graviton Research Capital LLP also reported strong growth for the year.

The performance highlights India’s growing attractiveness for market makers even as the Securities and Exchange Board of India tightens rules to tame retail speculation in derivatives. At the same time, regulators have taken steps to strengthen cash markets, expand ETFs and deepen commodity derivatives.

The financial year for these firms ended nearly five months after SEBI started imposing curbs on derivatives trading by limiting the number of weekly contracts to one index per exchange, charging upfront fees for option premiums and increasing contract size. The regulator also imposed a temporary ban on Jane Street Group in July, accusing it of manipulative trades involving options and stocks; The company denied these allegations.

Jane Street and Citadel Securities LLC have not yet released their numbers.

Sanchit Suneja, chief strategy officer at Motilal Oswal Financial Services Ltd. in India, said that despite the restrictions, futures and options trading “is the largest segment for HFT firms given the large volumes.” Algorithmic trading accounts for more than 50% of total trading volume in the equity derivatives segment by value on the National Securities Exchange, he added.

Hudson River reported a profit of nearly 22 billion rupees ($246 million) and revenue from operations rose 155% to 31.4 billion rupees, according to a filing with the Ministry of Corporate Affairs.

Graviton, a major player in cash equities, reported a 17% increase in profits to nearly 12 billion rupees. AlphaGrep’s profits rose 77% to 4.74 billion rupees. Dutch firm Optiver reported a profit of $44 million in its first full year in India, reversing losses from the first six months. The figures may not reflect the revenue generated for companies in India alone.

Algorithmic traders also profit from market making and cash-futures arbitrage on exchange-traded funds, Suneja said. He said private investors accounted for around 50% of options turnover, around 30% of cash equity trading and around 35% of futures trading in the last financial year.

Meanwhile, HFT firms are also adapting and exploring multi-frequency strategies. As small retail investors move away from derivatives, companies are diversifying into other segments.

“There is a surge in users,” Ishan Bansal, chief financial officer of digital broker Groww, said in an earnings call Friday.

Bansal noted that there has been a growth of 10% to 20% in the firm’s average order value per user in the derivatives segment in the last few quarters. He said this was because smaller participants were moving away from the futures and options segment.