Brokers for bumps in high-speed trading

Tell Sebi 'make co-location units accessible to small brokers'

The Association of National Exchanges Members of India (Anmi), a body of stockbrokers, has asked the Securities and Exchange Board of India (Sebi) to make co-location facilities accessible to smaller brokers, at less cost.

In a letter, it also urged measures to take care of systemic risk on algorithmic and other high-frequency trading (HFT).

Anmi has said the success of traders is now tied to adoption of algo technologies. “Smaller participants can be offered limited co-location facilities at lower costs, either with rack-space or a cloud-based solution,” went its letter. Co-location (colo) means having your server in the exchange building, facilitating faster trading time.

The body has asked for an increase in risk layers to manage the interaction between participants and exchanges, including controls on number of messages per second, number of total orders per second and maximum open orders in a product.

“The more the number of risk layers to manage, the lesser will be the instances of misfiring of colo programmes, although trade times might reduce,” said a broker on condition of anonymity.

These suggestions come in the backdrop of the market regulator's plans to impose curbs on algo trading. “Algo or HFTs are prone to high risks. We are examining a number of options to bring these down,” Sebi chairman U K Sinha had said in July.

Algo-based trades use advanced mathematical models for effecting transactions and can pump thousands of orders in a second. While algo trades provide liquidity as more orders are placed, they can distort prices if wrong programmes are allowed to run unchecked. HFT is a subset of algo trading. As of June, 18 per cent of the turnover on the exchanges came through the algo route. Another 24 per cent of volumes came through colo servers. Anmi has suggested introducing a bulk cancel and kill switch, to allow cancellation of bulk orders at the press of a button. It also wants exchanges to offer drop copy in real time, currently being offered with a delay or lag. Drop copy is a copy of all the trades done on the exchange, shared with brokers.

The association has further suggested that implied spread orders be made available at all exchanges, for the benefit of retail investors.

“Limit orders give retail investors the ability to trade at their preferred price. Additionally, exchanges can offer implied spread order functionality,” said their note.

A spread order involves placing two of these at the same time. For instance, buying this month's futures and selling next month's.

The brokers also want higher capacity network links between exchanges and non-colo locations, enabling effective dissemination of tick by tick (TBT) market data to interested participants. “TBT is fairly available to all market participants in India, as it is offered to both colo and non-colo participants. To ensure participants outside colo do not have issues in receiving the TBT feed, higher bandwidth leased lines to exchanges should be allowed,” said Anmi.