Props grab more of derivatives market; retail cedes share

Retail investors dabbling in derivatives often get the short end of the stick.

- Ram Sahgal

But few know that they lose out to proprietary traders or props-brokers trading on their own account with sophisticated algorithms.

Prop traders pay hefty sums to place their server racks in the exchange data centre (called colocation), something retail investors can't do. This enables props to access data of price movements fractions of a second quicker than retail investors, who use Internet-based trading and mobile apps.

The National Stock Exchange of India (NSE) charges 12 lakh to colocate a (full rack) server in its data centre, plus connectivity charges and taxes. The exchange started the colocation facility in 2009 so that brokers located in, say, Mumbai and Chennai would get data feeds at the same time, despite the Mumbai broker being closer to the exchange's servers.

Interestingly, exchange data shows that colocation-based trades accounted for 60.7% of gross turnover in April-December 2023, up 247 basis points (bps) from a year earlier, followed by mobile-based trade at 17.6% (up 22 bps), Internet-based trades at 8.9% (down 106 bps) and algo trades 1.1% (up 45 bps). A basis point is one-hundredth of a percentage point.