BSE’s India INX takes lead over global exchanges by adopting open source
Running a trading system on a proprietary software costs $12-13 million dollars. This is just the cost of running the system. Now, with open source, India INX is running the systems at a cost of $2mn; this results into savings of 80 per cent
BSE’s India INX was launched by PM Narendra Modi in January 2017. It’s India’s first International Financial Services Centre (IFSC), similar to the IFSCs of London, Singapore, Hong Kong, Dubai and New York. The technology platform is the fulcrum of any IFSC or exchange. India INX has already taken lead in the trade matching and response time of four microseconds, which is the world’s fastest and way ahead than the second fastest of the Singapore stock exchange at 50-60 microseconds. Secondly, the trades can be done by the investors at far lower costs than global exchanges, sometimes 70 per cent lower when compared to the cost of global exchanges; and technology allows India INX to take this lead. The adoption of an open source platform provides the cutting edge in this case.
Before we delve into the role of technology, let’s touch upon the importance of setting up an international financial centre in India. Global financial centres like London, Singapore, Hong Kong, Dubai or New York are buzzing with business volumes being exported from large growing emerging economies like India – in terms of both services bought by Indian companies as well Indians working in these financial centres. Today more than $50 billion is spent by Indian companies on charges for buying services from other global financial centres. More than 50 per cent of trade in Indian currency happens outside India. This is not just true of financial services. India’s consumption of gold is 25 per cent of global physical gold consumption per annum. Yet, our importers hedge their gold prices abroad with 97 per cent of exchange traded gold volume being traded overseas. However now, with India having its own IFSC, these investments can be done from India.
Interestingly, India INX achieved a major milestone recently, when the daily trading turnover of its derivatives segment peaked at about Rs 3,287 crore ($506.68 million).
The trading turnover on the India INX 32-troy ounce Gold Futures contract reached Rs 1,895 crore, constituting about 68 per cent of the turnover of the equivalent Gold Futures traded in the domestic markets.
Why open source?
More and more traders in India and globally, are using automated trading in the form of algorithmic and high frequency trading. This requires high throughput and a strong system to do the matching anonymously, with low latency. This is the key characteristic of any exchange globally – to be high throughput and low latency.
The India INX has exactly set up such a platform. The system can scale up to any number of trades to be processed per second. India INX’s parent, BSE has configured the system to process 500,000 orders per second. India INX has set the system to do 50,000 orders per second, but the Linux based new trading architecture adopted by INX can accept pizza box servers and correspondingly keep adding processing capacity at will. There are redundancies placed, making it a failover system.
In terms of latency, India INX is the world’s fastest exchange. “The latency of order confirmation at India INX is four micro seconds, at 95 percentile,” claims Balasubramaniam Venkataramani, MD and CEO, India International Exchange. An acknowledgement is also given back to the investor that the order has been accepted by the system. The usage of open source tools keeps the cost of transactions very low.
Running a trading system on a proprietary software costs $12-13 million. “Now, with open source, India INX is running the systems at a cost of $2 million – an 80 per cent cost saving,” informs Venkataramani.
The proprietary systems are expensive, as are being used by BSE and NSE. It includes heavy license fees. A robust security architecture has also been put in place at all the required layers – be it network, devices and finally at the system level. “We have a Tier 3 data centre, wherein security has been provided at all these levels,” says Venkataramani. The system has to be very robust by fault because Indian INX has been listed as the core infrastructure by the National Critical Information Infrastructure Protection Centre (NCIIPC). Moreover, the exchange uses the Red Hat Linux version, which is fully compatible with all the fixes. It is important to note that exchanges like NASDAQ and Singapore Stock Exchange takes about 50-60 micro seconds. They take more time, because of legacy systems. Indian INX, which was launched in January 2017 is using open source. “Earlier, at BSE, while using the proprietary system TANDEM, the response time was in milliseconds,” says Venkataramani.
The trading software has been licensed from a German company, Deutsche Börse Xetra. It has spent over $2 billion on building the product. “We have improved on this product on many aspects including latency. Compared to when we started in 2017, we are much faster in response times,” says Venkataramani.
Security and risk management
The risk management has been built into the system. In the aftermath of the flash crash in the USA and some incidents in India, proper controls have been designed. In case of any outage, the system gets auto cleaned up and the entire system is not affected. Even the victim’s system gets cleaned up allaying any worries about pending orders. Secondly, there are rules around order to trade ratios; there are multiple levels of pre-trade filters including both pre-trade and post trade checks. As a pre-trade check, self trades are not allowed.
AI is being used in the surveillance systems to keep tabs on the brokers and traders, because of the heavy usage of AI tools used by them. The algo trading tools are AI enabled and they learn on the fly, virtually simulating the behaviour of the manual trader. These tools can even be efficient beyond the human intelligence at much greater speed and efficiency. “It’s important that to police these actions, we need equally powerful systems, which are AI enabled. Thus our surveillance systems are heavily laden with AI. The BSE’s online surveillance system not only checks the internal systems but also the social media to check the abusive practices like frontrunning, insider trading etc,” says Venkataramani. For surveillance alone, over 10 software vendors are hired for all the BSE group companies. BSE has committed close to $5-6 million for investing in security technologies in order to be up to the speed with the emerging cyber threat scenario.
An ethical hacking team has been employed, which keeps the attack onslaught on a daily basis. BSE’s Security Operations Centre (SoC) is also being leveraged by India INX. It has been built in partnership with IBM with a five year contract. India INX has also been covered in the contract.
Building a universal exchange coupled with a digital financial infrastructure
India INX is building a supermarket for the investors to invest in the financial instrument of their choice. With one membership and billing for all investments. “Usually, the investors have to separately invest for commodities in commodity exchanges; separate equities market, debt, equity derivatives, currency derivatives, fixed income derivatives market, etc,” says Venkataramani.
It provides for economies of scale for the exchange. The broker or the investor can trade in any product with a single entry ticket.
India INX is also in the process of building a digital financial infrastructure – in the form of a cloud offering – for the investors to invest in the products of their choice on the medium of their choice. A Direct Market Access (DMA) will be provided wherein the participants can place their owned system at the exchange for faster market access. For manual users, the exchange has tied up with an API provider, which is BSE’s group company viz., Marketplace technologies. They have a BOLT on web software. It’s basically a cloud offering. A partnership with Thomson Reuters has been made for their cloud offering, which customers can avail.
Free APIs are also provided to enable customers to build their individual systems. In addition, the digital financial structure also includes getting feeds from international markets. This has been materialised through partnering with the network gateways. The exchange has also listed international software firms, who are offering readymade solutions, which can trade in any other international exchange and can also connect to India INX. Similarly, INX India has tied up with international network vendors who have tie ups with local telcos and operators. In addition, the exchange has a Tier 3 data centre.
The GIFT city, where the exchange is located, is covered with a fibre ring. This empowers anybody to link to the exchange from any building in GIFT premises. It’s like residential property prebuilt with Wi-Fi facility. The home owner needs to configure and start using the services.
Task cut out for the CIO
Availability, reliability and scalability of the system is extremely important. “Availability and reliability is a KRA for the CIO. Downtime at the exchange becomes national news, and has to be avoided at any cost,” says Venkataramani. The exchanges are highly regulated, yet they cannot be laggards in adopting new technologies. “I ask the CIO to keep looking at emerging tech in the exchange and other areas. To test the technology if required and also look for use cases,” says Venkataramani.