Sebi to re-examine algorithmic trading norms

Sebi will start a second round of consultations with market participants on algorithmic trading regulations by dropping some of its earlier proposals


Sebi wants to ensure that under high-frequency trading, or algorithmic trading, at least one trade is executed for a set number of orders to reduce hyperactive order book participation. Photo: Aniruddha Chowdhury/Mint
Sebi wants to ensure that under high-frequency trading, or algorithmic trading, at least one trade is executed for a set number of orders to reduce hyperactive order book participation. Photo: Aniruddha Chowdhury/Mint

Mumbai: The Securities and Exchange Board of India (Sebi) will start a second round of consultation with market participants on algorithmic trading regulations by dropping some of its earlier proposals, two people aware of the matter said. 

On 5 August, Sebi had issued a discussion or consultation paper proposing seven new ways to level the playing field between those using high-frequency trading (HFT) systems and regular market users.

Its proposals included revising the order sequence, introduction of a minimum resting time between HFT orders and uniform access to market data.

HFT, carried out through dedicated algorithms, refers to the use of the electronic systems that can potentially execute thousands of orders on the stock exchange in less than a second, which gives users an advantage over conventional traders. 

But sections of the market have protested these norms saying that they could impact liquidity, increase cost of trading and lead to a shift to overseas markets, prompting the regulator to take a re-look.

After getting feedback, Sebi thinks that two proposals—capping the order to trade ratio and reviewing tick by tick data feed—would be the easiest to implement initially, said one of the two people, declining to be named.

Typically, in high-frequency trading, a large number of orders are cancelled in comparison with trades that are actually executed. Sebi wants to ensure that at least one trade is executed for a set number of orders to reduce hyperactive order book participation. 

Under the proposal to review tick-by-tick data, the regulator wants easier access to information.

Currently, this data-heavy feed, which provides details of all orders and trades on a real-time basis, is subscribed by only HFT users for a fee. Sebi wants to provide structured data to all market participants at a prescribed time interval or as real-time feed to level the playing field. 

“Sebi wants to finalise norms for algo-trading starting next year which will be based on sound research,” the person added. An email sent to Sebi Wednesday seeking comments went unanswered. 

The two options being mulled by the regulator will have acceptance from the market at large, said Kunal Nandwani, chief executive officer of uTrade Solutions Pvt. Ltd, a trading solutions firm.

“Capping order to trade ratio will help in levelling the playing field between algo and non-algo users and has been implemented by several global exchanges with good results,” said Nandwani. 

Foreign institutional investors, through Asia Securities Industry & Financial Markets Association, and domestic brokerages had written to Sebi that the proposed norms could lead to migration of foreign institutional investors to other jurisdictions to seek exposure to Indian companies as the norms were too onerous with “little to nil” global precedence.

Anirudh Laskar contributed to the story.

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