Sebi proposes strict measures to curb 'algo trade' menace

Asks for reactions by month-end; aim to ensure 'level field' for non-algo investors

Concerned over the misuse of high frequency or algorithm trades (HFT), the Securities and Exchange Board of India (Sebi) has proposed a set of regulations to ensure fair access to non-algo investors in this space. It wants feedback by August 31.

In a discussion paper it issued on Friday, it has suggested a slew of measures. These include two separate queues for co-location (colo) and non-co-location (non-colo) orders, review of tick to tick data feed, minimum resting time for orders, random delay and random speed bumps, randomisation of orders and frequent batch auctions.

“As per the ‘minimum resting time mechanism’, orders received by the stock exchange would not be allowed to be amended or cancelled before a specified amount of time viz. 500 milliseconds is elapsed. Regulators/stock exchanges have considered the idea to eliminate 'fleeting orders' or orders that appear and then disappear within a short period,” went the paper.

As for the ‘random speed bump’, a short delay of several milliseconds before processing an order, “the expected impact is to discourage latency-sensitive strategies, as such delays would affect HFT but would not deter non-algo order flow, for which a delay in milliseconds is insignificant”, Sebi noted.

‘Separate queues’ for colo and non-colo orders ensure fair access to the trading system. “Co-located participants would still be among the first to receive the market data feeds, due to their proximity to the trading platforms of the exchange. This, coupled with the capability to make trading decisions in fractions of seconds (by use of trading algorithms) would still provide the co-located participants the ability to quickly react to such market data,” felt Sebi.

Such a mechanism is expected to nullify the latency advantage of the co-located players to a large extent, that they get on the basis of physical proximity to the trading platform. It is very unlikely that this will affect the HFT business or stock market volumes, feel brokers.

“The move shows the pronounced concerns of the regulator for these algo trades. The checks and balances will improve orderly trade ratio and encourage orderly trading, “said Alok Churiwala, vice-chairman, BSE Brokers forum

Besides, a ‘review by tick to tick’ or on a real-time basis would facilitate a detailed view of the order book. “The objective is to adhere to the principle of market fairness, by providing a level playing field to the market participants, irrespective of their technological or financial strength,” said Sebi.

The idea of a ‘frequent batch auction’ is to set a time interval for matching of orders, short enough to allow for opportunities for intra-day price discovery.

Similar concerns were a major topic of discussion at the International Organization of Securities Commissions. Its final report recommended transparent and non-discriminatory access to markets.

Currently, a little more than 80 per cent of the orders placed on most exchange-traded products are generated by algorithms and such orders contribute to approximately 40 per cent of the trades on the exchanges.

Sebi asked for public comments by August 31 and can also open for discussion if required by market participants.