Sebi moots 'surge charges' on members with high order-to-trade ratio

The Securities and Exchange Board of India (Sebi) is mooting to impose high transaction charges on brokers or trading members availing the co-location facility at stock exchanges. Access to co-location servers allows faster access to trade data. Typically, it is used for algorithm-based trading, also known as high frequency trading (HFT).

According to sources, the regulator is working on the concept of a “surge charge” on traders whose order-to-trade ratio is high. The said charges levied would be as much as four times the normal charge depending on certain parameters, including trading time, said a person privy to the development. 

Sources said the said concept was discussed by the Sebi’s expert panel on secondary markets in a meeting which was held last week. 

“The regulator has been working on the several proposals aiming to bring standardisation of the co-location (colo) facility. It is considering certain measures to address concerns that high-frequency traders have unfair access to the trading system of exchanges,” said the person cited above.

The source said Sebi is concerned over high order-to-trade ratio of certain participants.  The regulator wants to impose a higher levy on traders who unnecessarily clog the trading systems with high number of orders but fewer actual trades. 

Currently, the stock exchanges provide co-location facility by leasing out trading racks within the exchange premises to enable faster trades. Any trading member can avail these facilities by paying installation, deposit and annul charges to the exchange. The co-location facility is available in two variants, namely full racks and half racks. The half rack caters to relatively smaller trading members. 

The National Stock Exchange (NSE) charges an annual fee of Rs 1.2 million for a full rack and Rs 600,000 for half rack.

The exchange also charges a one-time initial set-up fee of Rs 100,000 and Rs 50,000 for full and half racks, respectively. But, rival exchange BSE does not charge any fees for the same facility. 

The Sebi had put out a consultation paper on HFT trading in August 2016, where it had mooted certain curbs on algo traders to provide a more level playing field. The proposals in the paper, however, were not implemented due to opposition from market players.

The market’s contention was that the rules were framed without taking all aspects into consideration, were not in line with global practices, did not have sufficient checks and balances, and would have had an adverse impact on liquidity.

The review of the HFT regulation was triggered by the NSE co-location controversy, where some brokers and officials allegedly made illegal gains through preferential access to the server.

These apart, the Sebi expert panel also suggested measures to limit retail participation in the F&O segment. For this, they suggested that to tweak the eligibility criteria for retail investors to enter the segment other than threshold limits fixed for trading.

The regulator is of view that lack of knowledge about the various aspects of derivatives trading could be forcing small investors to take undue risk. In July last year, it issued a discussion paper on 'growth and development of the equity derivatives market', asking various stakeholders to evaluate the need for strengthening the segment.

 
Co-location facility to cost more

• Regulator mulls ‘surge charges’ on algo trades
• Currently, brokers pay annual fees to avail co-location facility
• Sebi observed high order-to-trade ratio of certain participants
• Charges levied could go up to four times depending on the trade volume
• Regulator observed clog in the systems due to high numbers of orders
• Concept was discussed by the Sebi’s expert panel on secondary market
• Review of HFT regulation triggered by NSE co-location controversy