Indian watchdog tackles algo trading growth
and Exchange Board of India (SEBI) has revised its guidelines
for algo trading and published the results of a ‘Review of Ownership and Governance of
Market Infrastructure Institutions’, which opens up the possibility of Indian exchanges listing themselves on other bourses.
Recognising the rise in algo trading on its exchanges, SEBI has set out a series of regulations to control and oversee
electronic trading. Algo and co-location trading accounted for about 25% of
derivatives volume and around 30% of equities volume on the National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE) last year, and SEBI has
expressed concern about the drive for ever lower latency.
“At the moment in India, we have a delay
of eight microseconds and there are still demands for it to come down. At some
stage, this has to stop,” said SEBI chairman U. K. Sinha last month. “You have
to ask the question, what
is it you are gaining in eight microseconds versus 20 microseconds? And also,
do the exchanges and SEBI have the capacity to regulate eight microsecond
issues? I doubt it. It will take quite some time.”
The new regulations will mandate
exchanges to have systems in place to cope with algo trading, including
blocking order flooding and creating financial disincentives to discourage high
order-to-trade ratios from brokers.
All algo orders will have to be routed
through broker servers located within India, and exchanges are required to
implement ‘appropriate risk control mechanisms’.
The exchanges must install systems to identify
‘dysfunctional algos’ that lead to a ‘loop or a runaway situation’ and shut
down brokers’ terminals if necessary. Exchanges must also be able to manually enable the terminals of brokers
which have been disabled due exhaustion of collateral.
Price checks and quantity limit checks must be implemented
to ensure orders don’t violate price bands defined by exchanges, or the maximum
quantity of a stock in an order, as defined by the exchange. Where price bands
don’t exist for a stock, ‘dummy filters’ must be put in place.
Other measures include requirements for exchanges to track
and report algo trading, as well as synchronising exchanges’ system times with
an atomic clock.
“There’s nothing sinister in the new regulations. They
should be broadly welcomed and bring India largely in line with best global
practices,” says Hirander Misra,
former COO of Chi-X Europe and now acting as a consultant for Indian exchanges.
“The quantity limit checks address ‘fat finger’ errors but I
think a percentage of turnover safeguard would be more robust,” suggests Misra.
“They also don’t have any circuit breakers in place, nor are they looking at
of the clearing house set-up is also in the works. SEBI announced a committee
to look into whether a central clearing house or multiple interoperable venues
was preferable. Clearing houses too are to be able to float and attract
investors, though ownership curbs will apply.
Meanwhile, SEBI’s review of governance of exchanges
themselves has cleared the way for them to float on other bourses. Overseas
investors holding stakes in Indian exchanges, including Deutsche Borse and SGX,
which own 5% of BSE, now have an exit route, making the bourses potentially more
appealing to foreign capital.
Nevertheless, restrictions on ownership will continue, and ‘no single investor will be allowed to hold more than 5%
except the Stock Exchange, Depository, Insurance Company, Banking Company or
public financial institution which may hold up to 15%.’
The Indian market is currently dominated by the two
Mumbai-based exchanges: NSE and BSE, with the newly revived Delhi Stock
Exchange looking to make a comeback through its agreement to use LSE’s
“There are about 16 regional exchanges with hardly any volume and which
mainly trade on BSE and NSE through their broker dealer subsidiaries,”
points out Misra.
has stipulated that those exchanges have three years to achieve a net worth of
100 crores (US$20 million) and annual trading volumes of 1,000 crores, or face
being closed down.