Two days before retiring as the chairman of the Securities and Exchange Board of India (Sebi), U.K. Sinha on Monday said the markets regulator is in the process of framing a fair policy for algorithmic trading.
Sinha said Sebi has appointed an external expert to study the stock market trading pattern and recommend ways to tackle any potential issue arising out of algo trades.
On 27 April, Mint first reported India’s capital markets regulator is considering hiring an external agency to advise it on ways to mitigate risks arising from the increasing use of so-called high-frequency trading (HFT). Sebi was also considering to introduce a number of prudential norms to curb such risks and create a level-playing field between HFT and non-HFT users, according to the report.
Algorithmic trading, which involves HFT, refers to the use of electronic systems, which can potentially execute thousands of orders on the stock exchange in less than a second.
Sebi has appointed the external expert for recommending new HFT norms after floating a discussion paper in August 2016, which is unlike other instances when it first appointed experts and then released a discussion paper.
According to data available with Sebi, the share of HFT as a share of total orders and turnover has been rising steadily. In 2011-12, HFT orders as a percentage of overall orders in the cash equity segment was at 65%. This has gone up to 94% in 2015-16. HFT turnover as a percentage of overall turnover in the cash equity segment has gone up from 25% to 42% over the same period.
In the equity derivatives segment, the percentage of HFT orders has gone up from 78% to 98% between fiscal 2012 and fiscal 2016. The share of turnover has risen from 22% to 56%.
On 5 August, Sebi released a discussion paper stating that it was examining ways to allay concerns of unfair and inequitable access to the trading systems of exchanges.
Some of the options suggested by Sebi were introduction of a minimum resting time between HFT orders; matching orders under a batch system; introduction of random delays of a few milliseconds in order processing; revising the order queue randomly every 1-2 seconds; and capping the order-to-trade ratio.
“India is one of the few countries that have devised a policy to control the use of algo," Sinha said on Monday in a media conference.
Sinha said in the coming days, Sebi may increase the penalty imposed for high order-to-trade ratio. Typically in HFT, a large number of orders are cancelled in comparison with trades that are actually executed. Sebi said in its August discussion paper that it wants to ensure at least one trade is executed for a set number of orders to reduce hyperactive order book participation.