Investor association moves House panel on algorithm trades

Seeks intervention on weak Sebi processes, regulation of controversial trading segment

A Delhi-based Investor Association has submitted a representation to the Veerappa Moily-headed Parliamentary committee on finance on alleged irregularities in the processes followed by Securities and Exchange Board of India (Sebi) in introducing algorithmic trading in Indian markets.

Midas Touch Investor Association has sought the panel’s intervention in reviewing the regulation in the new market segment, which according to market estimates, accounts for about a fifth of total volumes on the exchanges.

Key issues raised by Midas include lack of transparent processes in introduction of algo-trading, inadequate safeguards to ensure level playing field for small investors and perils of delegating regulatory oversight of such trades to exchanges.

“I have personally handed over the representation to the chairman. He has promised to look into it,” Virendra Jain, president, Midas Touch told Business Standard.

ISSUES RAISED BY MIDAS TOUCH

• Lack of transparency in formation of the algo trading framework in 2012
• Inadequate guidelines on physical infrastructure of colocation services
• Inadequate safeguards to ensure level playing field
• Delegation of regulatory function to bourses against letter and spirit of law
• Processes not as robust as followed by SEC

It has alleged that unlike its American counterpart, the Securities Exchange Commission (SEC), which had sought public comments before introducing the co-location framework, Sebi did it without consultations.

The submissions assume significance as the panel had earlier directed Sebi to look into a whistleblower letter alleging manipulation in the algo framework.

In a statement, Midas Touch Investors Association said it has “made a representation to Shri Veerappa Moilly, chairman of Parliamentary Standing Committee on Finance, on regulation of algorithmic trading guidelines by Sebi, whistleblower and the current National Stock Exchange controversy relating to it. The representation states that this matter is important enough to be taken up by the committee and necessary directions be given subsequently.”

An e-mail, seeking comments on the submissions, sent to a Sebi spokesperson on Tuesday did not elicit any response. Following the whistleblower report, a financial stability report by the Reserve Bank of India in June had cautioned that these high speed trades can pose risks in the form of erroneous trades and manipulation. In July, Sebi Chairman UK Sinha had said the regulator was looking at options to bring down risks in the segment.

The association has told the house committee in its representation that Sebi adopted a “non-transparent process” and did not invite stakeholders comments while framing a draft of guidelines, and subsequently in “the issue of Initial guidelines for Algorithmic Trading and co-location and its supporting infrastructure in 2012.”

Further, it said the initial guidelines did not contain any instructions “about the co-location and other hardware and physical infrastructure required to ensure a level playing field among all participants in the securities market”. It is completely silent about co-location, Midas said.

According to the association, which had taken up several investor issues, including the Satyam Computer scandal in the past, the initial guidelines are in violation of the Sebi Act and Securities Contracts Regulation Act, in letter and spirit. The initial guidelines, Midas argued, impliedly empowered stock exchanges to license and regulate Algorithmic Trading and co-location as they deem fit with hardly any Sebi oversight. “Under the securities laws, Sebi is the regulator entrusted with regulating stock exchanges and securities market , among others. These functions cannot be delegated,” the representation said.

The representation stated that even in the US, specific approval of the SEC was required to be obtained by the stock exchange for detailed terms of co-location and related services.