Technology Adoption Brings Change to Indian Capital Markets

While foreign brokers have influenced the adoption of high-touch DMA and the FIX protocol in India, Celent analysts say fully automated DMA remains a distant pipe dream as regulators are skeptical.

The Indian capital markets are entering an important phase of technological and regulatory evolution. The economic crisis showed that, while the “decoupling theory” was not necessarily true, it had got some facts right. There was an exodus of foreign funds from the market, but it remained resilient—ample proof that the risk management and regulatory norms were more than capable of providing a stable market environment.

This, and the fact that India has been one of the rare growing economies across the globe, have made the Indian markets a very important investment destination. The confidence of market participants can also be seen with globalization of the Indian market indices and regulatory adoption of complex, yet necessary product innovations in the market.

However, there are issues of concern with the Indian capital market. The market is highly concentrated; a small number of scrips (a.k.a. shares) dominate most of the trading at the exchanges: top 5 percent companies account for more than 80 percent of total trading value. This clearly narrows down the breadth of the market, giving rise to liquidity problems for many stocks. Geographic breadth is another problem for Indian markets. Celent estimates that 80 percent-to-90 percent of total cash trading comes from the top 10 cities, with the top two cities accounting for around 60 percent. This implies a large portion of the population is untapped.

These issues can be addressed by technology development, better regulations, and sustained focus on financial inclusion. The capital market regulator, Securities and Exchange Board of India (SEBI), has been actively developing the markets by addressing many of these issues.