FMC guidelines on algo trading likely next month

After disallowing facilities for algorithm trading in mini contracts on commodity futures exchanges, the Forward Markets Commission (FMC) is finalising guidelines for these and for high frequency trading (HFT). These are expected to be issued next month.

Algo, as this software-based trading is known in market parlance, has been a concern for regulators. The Multi Commodity Exchange, the largest in the segment, generates around 20 per cent of its daily volumes from algo trading and HFT while the second largest, the National Commodities and Derivatives Exchange, generates eight per cent of its volumes from this route. It is not much on other exchanges.

FMC has asked for suggestions from the exchanges and soon after studying these, a circular will be issued to regulate algo trading, said an official at the futures market regulator.

In algo trading, orders are executed immediately or cancelled. But it is felt these send a wrong signal to the market. Under the proposed guidelines, once the order is placed through an algo program, even if it is not executed, it will not be allowed to be cancelled immediately.

Another proposal is not to allow market orders under algo trading. There are market-wide price limits in place for each commodity, beyond which either-side movement is not allowed in that commodity. When a trade is placed thorough algo software, market orders will not be accepted and there will be order-wise price limits, said a person familiar with the proposal.

Software based trading has another pitfall. There can be any number of orders per second and in many cases, orders would get cancelled if not executed immediately. To check this practice, FMC is mulling a ceiling on the number of orders per second.

Earlier in this financial year, the capital markets regulator, the Securities and Exchange Board of India, had decided on broader criteria for regulating algo trading. It had asked stock exchanges to issue detailed guidelines on the subject, now in place. FMC is planning to instruct commodity exchanges to execute guidelines issued by it.

FMC is also considering whether to decide an order-to-trade ratio. This means all orders would not be executed when placed through the program. The incentives would vary on the rate of executions.