SEBI may impose restrictions on algo trade
The Securities and Exchange Board of India (Sebi) is planning to impose restrictions on algorithmic trading by introducing a congestion charge for a prescribed slab that will be levied on traders. The move is aimed at ensuring that algorithmic trading doesn’t give market participants an unfair advantage over those with no access to such technology.
The proposal was discussed last week by the regulator’s Secondary Market Advisory Committee. If the curbs are implemented, Sebi will be the among the first to do so globally. In 2016, the regulator had proposed the introduction of maximum order message-to-trade ratio requirements among several other proposals.
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 hyperactive orderbook participation.
Apart from order-to-trade ratio, the regulator had proposed six other measures including minimum resting time for orders, speed bumps to delay order matching, randomisation of orders and review of tick-by-tick data among others to reduce velocity. Algorithmic trading constitutes more than 50 per cent of the total in the cash and derivatives segments in India. The equivalent ratio in developed markets like the US and UK is more than 85 per cent, experts said.
“If you put some charge, then order-to-trade ratio will increase and there will be less burden on the system,” said a person familiar with the development. Traders are said to regularly place large orders and then cancel them, putting a burden on the system. This also obstructs price discovery and denies access to small investors. In many cases, such unexecuted orders are massive in number while actual trades are very low.
Currently, more than 80 per cent of the orders placed on most exchangetraded products are generated by algorithms and such orders contribute to approximately 40 per cent of the trades on the exchanges, Sebi has said. The Sebi panel on the secondary market, which is headed by Indian Institute of Management-Ahmedabad professor JR Varma, also discussed the interoperability of clearing corporations and having client-level settlement of collateral securities and funds.
“In the cash market, there is no client-level settlement of securities and funds. There is a suggestion that investors’ interest should be protected if the broker goes bust,” said one of the persons cited above said.
The Economic Times, New Delhi, 13th March 2018