The Securities and Exchange Board of India (Sebi) sent out two important circulars late last week—one approving smart order routing (SOR) technology and another allowing mobile trading. These should have been released months ago but, as they say, better late than never.
India is among the very few markets in Asia where the same stocks are listed on two different exchanges. Needless to say, when a broker executes a client order, it should be done at the venue which offers the best price at that given time. In fact, Sebi’s regulations and prescribed code of conduct for brokers stipulate that client orders should be executed at the best available market price.
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SOR takes this principle forward since it enables best execution in the world of electronic trading. Sebi had permitted direct market access and algorithmic trading a little over two years ago. For some reason, all this while, brokers weren’t allowed to deploy automated systems that electronically pick the best possible price for clients. This was a clear contradiction: On one hand, brokers had to ensure best execution; on another, they weren’t allowed to do so using automated systems.
Strangely, Sebi hadn’t banned SOR. Brokers need to get the approval of exchanges for all of their automated systems and when they approached the National Stock Exchange (NSE) to get SOR systems approved, they were turned away. One of NSE’s main contentions was that both exchanges should have a reliable audit trail to ensure that an investor dispute can be addressed well. The audit trail will act as proof of which exchange offered a better execution price at any given point, in case of a dispute.
The Bombay Stock Exchange (BSE), on the other hand, has been claiming that NSE has been delaying the introduction of SOR because of fears that it may lose some of its share in order flow once the technology is allowed. The two exchanges were supposed to come up with a common framework to ensure that SOR can be implemented, but the bilateral talks didn’t go anywhere. As this column has argued before, this was a clear case for Sebi to intervene, and market participants would be relieved that the regulator has finally done that.
James Rae, director and head of Advanced Execution Services (AES) sales for Southeast Asia at Credit Suisse, says, “The Sebi circular on SOR is a positive development for India’s equity market as it provides a transparent and defined framework for the exchanges, regulator, and brokers to implement the SOR initiative. It clearly sets out expectations of all participants, including a 30-day response time by the exchanges after an application has been submitted.”
Studies done by Credit Suisse’s quantitative analysts show that while BSE has a market share of only 20% in total trading, it offers the best execution price around 35% of the trading period on a given day. As such, Rae says that benefits from SOR can be substantial in India.
The Sebi circular sets out a number of guidelines on SOR implementation and some of NSE’s concerns seem to have been taken on board. Even so, the guidelines aren’t onerous. Murat Atamer, head of AES product-Asia Pacific, Credit Suisse, says, “Most of Sebi’s requirements are in line with practices employed by other markets in the region who utilize SOR.”
“The only difference would be a prudent feature requiring a third-party audit, as opposed to an internal or exchange audit.” Sebi’s comprehensive policy framework has set the ball rolling for SOR and market participants accessing Indian markets would soon be able to enjoy best execution even using automated systems.
The approval of mobile trading is an equally important development from a retail investor’s point of view. Considering that the number of people with mobile phones outstrips the number of people with Internet connections by about 50:1, the future for mobile trading in India is quite bright. As one expert says, the end-user connectivity is already in place and the system just needs to be plugged into the vast network of mobile users in the country.
Of course, the benefits from mobile trading will be visible over the long-term, but it goes without saying that the move is a big positive for the development of the Indian markets and will enhance the investor base in the country.
As pointed out in this column before, customers of a handful of brokerages such as ICICIDirect.com and Reliance Money can already place orders to buy and sell stocks on their mobile phones, using wapsites or lighter versions of their existing Internet trading websites. Sebi’s new guidelines allow the use of mobile trading applications which allow rich features that are used in developed markets. With smartphones becoming increasingly affordable, and since more and more brokers will now offer mobile trading services thanks to the new guidelines, these services will soon start contributing meaningfully to overall market turnover.
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