The regulator may consider periodic auction for algo trade, separate queue for algo orders and randomisation in algo trades; final regulations in three months
The capital and commodity market regulator, Securities and Exchange Board of India (Sebi), will issue a discussion paper for the proposed regulations for high frequency trading (HFT, or algo trading). The regulator may consider periodic auction for algo trade, separate queue for algo orders and randomisation in algo trades.
With these regulations, Sebi wants to provide level playing field for the retail investor and try to curb possibility of manipulation by using algo trading.
The regulations are likely to be finalised in three months.
Algorithmic trading (also known as automated, black-box, or simply algo trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader.
Sebi is considering many proposals regarding algo mechanism. The regulator is contemplating a separate queue for algo orders, and a periodic call auction, especially for algo trades. It also wants to bring in a mechanism which may delay the algo order, randomise algo trades and curb on tick by tick data which have been provided to algo trader.
The periodic call auction means selling stocks by bid at intervals throughout the day.
Rajeev Kumar Agarwal, the whole time member of Sebi, told dna, "We are considering various measures for algo trades including randomization, periodic call auction and delay the algo trades. We are in the last lap of finalising norms for algo trading norms".
All orders received within a set period would arrive at the stock exchange only after the randomisation process, said another official. Since the period is small, there would be only a limited impact on non-algorithmic trading players. This will, however, reduce the advantage of speed enjoyed by algorithmic traders since all orders would be intermingled before execution.
Tick-by-tick data, relative to each transaction, are called ultra high-frequency data, considered to fuel HFT.
Sebi feels that algo trades run the risk of creating distortion in the capital market. Since market participants have been using hi-tech tools in algo trades, it may create a non-level playing field in the market.
In the recent times, participants have started using algo trading for their own benefit. Algo trades always have a large number of trades which may hamper the risk management of the stock exchanges and might impact capital market adversely.
"We have to resolve the negative points of algo trades and maintain a level-playing field for all category investors and try to curb negative effect of algo trades," said Agarwal.
Algo trading gathered more light after a whistleblower alleged that a stock exchange was giving unlawful access to some brokers.
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