Mumbai: The Securities and Exchange Board of India (Sebi) announced norms to make algorithmic trading more accessible for investors. It asked stock exchanges to introduce shared co-location services to cut costs.

Algorithmic trading refers to orders generated using automated execution logic. Co-location allows members to place their servers in the exchange premises for faster access to trading.

Sebi proposed a penalty framework for high order to rate ratio.

A high order to trade ratio means that there are many orders that are not converted into trades. The regulator also told bourses to provide tick-by-tick data feed (TBT Feed) to all trading members free of charge. This will allow every trading member to know the best prices of any given stock on a real-time basis so that everyone is able to take equal advantage of price movements in stocks.

Sebi’s move will allow small and mid-size brokers get a share of the co-location racks at exchanges for a monthly rent of Rs40,000-50,000.

In the equity derivatives segment, the percentage of high frequency trade (a subset of algo trade) orders has gone up from 78% to 98% between fiscal 2012 and fiscal 2017. The share of turnover has risen from 22% to 56%.

In a separate move, Sebi introduced the so-called product suitability framework to ensure that individual investors have a safety net when invested in equity derivatives.

“There is something called as product suitability. Just because markets are doing well, it does not mean that all should invest in these complicated products," said Sebi chairman Ajay Tyagi.

Investors invest in equity derivatives will need to disclose income as per their return filing and if investment is not commensurate with income then brokers would need to do due-diligence, said Sebi in the press statement.

“We would like to see the details. However it seems that the retail validation (product suitability) will reduce the market size as it will lead to more compliances for both the investor and broker. Having said that it may reduce speculative trading as well. Even physical settlement at this point looks to be reducing market size as many clients would prefer to square of position before expiry," said Kunal Nandwani, founder and chief executive officer (CEO) of algorithmic trading technology provider uTrade Solutions.

Sebi enhanced the criteria for scrips eligible for futures and options or derivatives segment. It said that scrips that do not meet the enhanced compliance criteria will move to physical settlement.

“To facilitate greater alignment of the cash and derivatives market, physical settlement for all stock derivatives shall be carried out in a phased and calibrated manner.… The existing criteria like market wide position limit and median quarter-sigma order size shall be revised upward from current level of Rs300 crore and Rs10 lakh respectively to Rs500 crore and Rs25 lakh respectively," said Sebi in a statement.

The enhanced criteria are to be met continuously for six months. To begin with, stocks which are currently in derivatives segment but fail to meet any of the enhanced criteria will be physically settled.

Such stocks would exit the derivative segment if they fail to meet any of the enhanced criteria within a period of one year, Sebi said.

“The physical settlement will remove inefficiencies from the system and will lead to more investor confidence. However the system needs to work across all companies not just the smaller ones. As far as due diligence by brokers on derivatives exposure for retail investors, it is not his (broker’s) job as he is not an investigator. Nowhere in the world such measures are present," said Deven Choksey, group managing director at KR Choksey Investment Managers Pvt. Ltd.

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