08.08.2016
By Rob Daly

OPINION: What FX Can Teach Equities

There is more than one way to skin a cat when it comes to regulating high-frequency trading. The Securities and Exchange Board of India has found six.

The market regulator has issued a call for comment on each of the proposed methods that the SEBI might implement to blunt HFT’s perceived negative impact on market quality.

They include establishing a 500-millisecond resting time for orders; introducing frequent batch auctions; creating random delays for processing and matching of orders; randomizing the order queue during a defined period; defining a maximum transaction-to-order ratio, and segregating co-located order flow from normal order flow and alternating order matching between the two flows.

None of the of the proposed frameworks are especially radical. In fact, most of them have been either implemented or, at least, examined by other national markets regulators.

The Australian Securities and Investments Commission sought feedback on a resting-order requirement a few years ago, but the regulator has not moved on the rule.

The SEBI also is thinking about introducing series of 20- to 30-millisecond batch auctions in a similar fashion to how the Taiwan Stock Exchange operated before it adopted its current continuous-matching model.

Mention adopting processing delays or speed bumps, and IEX and the TSX Alpha exchange usually are the first names that spring to mind. However, the electronic spot foreign-exchange market has been using this trading methodology for a while, with success.

Thomson Reuters and Tradition, the inter-dealer broker, each uses speed bumps in their respective FX Spot Matching service and ParFX platform.

The Indian regulator also thought that the EBS market-making platform with its ‘latency floor’ also has possibilities in the equities market.

The platform uses three ‘batching windows’ of one-, two-, or three-milliseconds in duration. The platform collects all the orders during one of these windows before randomly releases the collected orders to the matching engine.

If the SEBI eventually adopts one or all of these proposals is anyone’s guess. Yet given the regulator’s somewhat antagonistic approach to algorithmic trading, the SEBI is far more likely to adopt them than the U.S. Securities and Exchange Commission.

If the SEBI, SEC, or any market regulator truly is serious about reducing the amount of high-frequency trading in their markets, all they need to do is establish an order-cancellation fee. It would strip the profitability from strategies that rely on 99 order cancellations for every completed trade almost instantly.

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