Sebi along with its global peers are looking into ways to handle risks emanating from high frequency trading (HFT) as well as frame global standards related to this technology, the regulator's Chairman U K Sinha has said.
Observing that the technology used in capital markets has come to a level where it is posing a challenge to participants as well as the regulator, Sinha said Sebi has put in place preliminary guidelines to tackle the problem but a global solution is being worked upon.
"Technology is come at a level where it is posing as a challenge for the companies and for participants in the market and the regulator. HFT trading and co-location is one such area... Sebi has come out with some preliminary guidelines on the same," Sinha said in his address at the Thomson Reuters Risk Summit here.
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"But not only Sebi but whole of global regulators are today struggling to find out what is the best way to handle it... Because there is so much space for reducing the latency for few micro seconds that regulator all over the world are looking into taking some action which would be of global standard," Sinha said, adding Sebi is also participating on the discussions.
High frequency trading also called algorithmic trading or 'algo' in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade, and it is mostly used by large institutional investors.
HFT exposes the market to possible systemic risks.
The rise of High frequency trading (HFT), a type of algo trading, has raised concerns with regard to its impact on market quality, financial stability and regulatory framework.
Further, while noting that Sebi's risk management framework is hailed as one of the best in the world and the regulator follows each alert sounded by the market, Sinha said the major challenge is being posed from with regard to challenges emerging in the global economy particularly India's neighbouring countries.
The regulator is examining various options to allay fear
and concern of unfair and inequitable access to the trading systems of the exchanges.
Accordingly, it has decided to consult market participants and seek their views on the efficacy and need to introduce the several mechanisms in markets.
It also proposed to introduce randomisation of orders, maximum order message-to-trade ratio requirement and review of tick-by-tick data feed.
Under the randomisation of orders, time-priority of the new/modified orders that would be received during predefined time period (say 1-2 seconds) randomised and the revised queue with a new time priority is then forwarded to the order matching engine.
A maximum order-to-trade ratio requires a market participant to execute at least one trade for a set number of order messages sent to a trading venue.
"The mechanism is expected to increase the likelihood of a viewed quote being available to trade and reduce hyper-active order book participation," Sebi said.
Tick-by-Tick data feed provide details relating to orders (addition + modification + cancellation) and trades on a real-time basis. It facilitates a detailed view of the order-book (such as depth at each price point).
At present, the exchanges provide Tick-by-Tick data feeds to any desirous market participant upon payment of requisite fee.
"The proposal under examination is to provide 'Structured Data' containing Top 20/Top30/Top 50bids/asks, market depth, to all the market participants at a prescribed time interval (or as real-time feed)," Sebi noted.
The regulator proposed to launch frequent batch auctions. This mechanism would accumulate buy and sell orders on the order book for a particular length of time (say 100 milliseconds). At the end of every such period, the exchange would match orders received during the time interval.
This proposal would try to address the problem of 'latency advantage' by undertaking batch auctions at a particular interval.
"The idea is to set a time interval for matching of orders which is short enough to allow for opportunities for intra-day price discovery,but long enough to minimise the latency advantage of HFT to a large extent," Sebi said.
