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The Securities and Exchange Board of India (Sebi) has suggested to bring greater parity among brokers who have a presence near the exchange through co-location and proximity hosting and those not using such facilities.
It has suggested that exchanges create two separate categories of orders between brokers with systems close to the exchange and others; and alternate execution of orders between the two.
“It is expected that such architecture will provide orders generated from a non-collocated space a fair chance of execution and address concerns related to being crowded out by orders placed from co-location,” said the Sebi discussion paper released on the exchange website on Friday.
“If an order is taken from the queue of orders emanating from co-location / proximity hosting facility, then the next order shall be from the other queue,” it said.
Co-location or co-hosting is a service offered by the stock exchange (or by third-parties appointed by the stock exchange) to its stock brokers and data vendors to locate their trading or data-vending systems within the stock exchange’s premises. Proximity hosting is a variant of the same.
This is used to reduce the time taken for order execution by algorithmic trading programmes by reducing the distance that such orders would have to travel to the exchange system for execution, measured in milliseconds.
Creating two separate order streams may work against this very purpose.
Naveen Kumar, managing director at QuantXpress Financial Technologies, stated that the move would be a headwind for brokers using co-location. “This would slow down the process for co-located servers,” he said.
Another algorithmic trading vendor, too, stated that the co-location will not be as fast if the proposal is implemented.
Orders placed from terminals of stock brokers located at co-located space form a sizeable chunk of the total orders received by the stock exchanges, noted the Sebi paper. It accounted for 73.88 per cent of orders in the cash market and 94.16 per cent of orders in the derivatives segment on the National Stock Exchange, the largest exchange in terms of market volumes, said the paper.
Sebi has asked that all stock brokers and data vendors located at co-location / proximity hosting experience similar latency between their systems and the stock exchange’s trading platform.
It has also asked that exchanges provide sufficient space to ensure that everyone who wishes to make use of a co-location facility can be accommodated. “Stock exchange shall also avoid situation of monopolising of rack space by certain stock brokers or data vendors,” it said. Sebi has invited comments on the same till May 31.
