Wednesday, February 25, 2009

The BPO path to international finance

In thinking about India's evolution into the world of international finance, the MIFC report broke the problem into two parts. The first set of problems were those which could be done in a business process outsourcing mode. This requires good human capital, good telecom, and good urban infrastructure.

The other were the set of problems which required local and foreign financial firms, markets, and regulators. This requires sound financial and monetary policy.

Writing in DNA, N. Sundaresha Subramaniam has a story about a financial firm named Fountain Securities Analysis setting up a team of 150 people who will do day trading on international markets. The article says that this will go up to 650 traders in time. I think this is a very smart move. India's capabilities in this area are quite remarkable: for a wage like $200 to $400 a month, with a profit sharing contract on top, one can hire a very smart trader in India.

The legal architecture would work as follows. The Indian staff would use the Internet and log into some computer systems kept outside the country. Through this they would get trading screens on exchanges and execute trades on behalf of a legal person which is kept safely outside India, so as to avoid the infirmities of Indian taxation, capital controls and financial regulation. There is an increasingly large range of problems where such arrangements can be setup. Some of the most exciting finance that takes place on Indian soil could thus come about at a safe distance from the faulty mechanisms of Indian legal/regulatory/tax systems. This does not yield a full fledged international financial centre (IFC), but it does yield progress towards that direction in terms of (a) human capital development and (b) visibility in the eyes of the global financial industry.

In Chapter 5 titled Augmenting IFS provision via BPO, the MIFC report emphasises the opportunity for India in the field of algorithmic trading, since this relies more on raw intelligence and less on the human-centric flows of information that tend to take place out of physical proximity and old boys clubs. What starts off as establishing teams of traders in India can easily grow into that.

7 comments:

  1. This is not new. There are a few others. I personally know of one hedge fund that has 100 people in an office in Andheri in Bombay doing just this.

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  2. You have mentioned that "Some of the most exciting finance will take place on Indian soil, at a safe distance from the faulty mechanisms of Indian legal/regulatory/tax systems". Is it not a very sad state of affairs if we can't set our own house in order!!

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  3. More than half of my community does NSE/BSE and cash/future arbitrage trading. they are cowboys, literally.

    the compensation structure goes something like this: 50-60% of the profits/loss go to the broker and the remaining is split in half between the two traders (yes, they work in pairs).

    bull markets see them take home any where in the north of Rs.35-40,000 per month (USD 700-800)...in some of the cases the take home per trader is higher than a lac per month. however, there is no fixed salary.

    take home profits drop by as much as 60-70% (and in some case even more) during bear markets.

    some of the brokers have put smart risk management systems, wherein every trade of every pair is monitored closely. traders are not allowed to speculate, which means if there is a large gap (defined as say a difference of more than 0.5%), they are first warned and on a repeat, asked to leave.

    the biggest strength of this bunch of traders is there adaptability. most of them are not even graduates, and yet they trade in cash, options and futures for stocks and commodities like pros. one of my uncles does decent amount of options trading (he specializes in volatility arbitrage...which in his language is "volatility khate hain", without knowing anything about black scholes and the likes.

    i truly believe outsourcing of trading (more specifically arbitrage trading) is here to stay, regulations permitting!

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  4. I think this is very important development in the path to Trading expertise.The need for volatility trading market need not be over emphasised in a globally integrated market scenario.

    There a few firms like Futures First in Hyderabad doing trading as smart human capital is available.
    Intraday trading in US markets one firm comes to mind is SMB Training and their blog gives lot of good ideas.
    I think for developing volatility trading liquid stock options market is key.

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  6. The BPOs in India face an enormous challenge in reducing attrition rate and this being a nascent industry needs to draw parallels.Before we proceed its important to understand the underlying reasons for high attrition rates, which are pretty steep and are around 40-50%. Currently it is about 35% in non-voice and 45% in voice call centers. About 80% of them look for better careers within the same industry.

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