SEBI Looks to Strengthen Low-Touch Guidelines
One regulator is carefully examining ways to make electronic trading easier and promote the use of algorithms in its trading markets.
Indian market regulator Securities and Exchange Board of India (SEBI), has announced it is looking at a number of measures to strengthen its algorithmic computerized trading framework, which includes mandating the exchanges to offer shared co-location facilities and providing some services for free.
Also, the regulator has also proposed a review of trading requirements for algo software for strengthening the algorithmic trading framework by mandating stock exchanges to provide a simulated market environment for testing of software used for such high-frequency trades.
The proposed move is expected to be discussed later this month or early next by SEBI’s board, along with a number of important matters including amendments to rules on angel funds, mutual funds, buyback of shares, takeovers, registrars and bankers to issues, suspension and revocation of trading and distribution of cash benefits by listed companies.
Specifically, within algorithmic trading, which has been under public glare because of an ongoing probe concerning leading stock exchange NSE, an official said various measures are being proposed to address the concerns relating to market quality, market integrity and fairness on account of usage of algo trading and co-location. This is strikingly similar to what has taken place in the US trading markets preceding and following the May 2010 “flash crash.”
The regulator has been active in pursuing, creating and implementing a formal regulatory framework regarding algorithmic or electronic trading, which like in the US, has attracted the attention of investors and regulators about the issues of market fairness, accessibility and ethics. Now, SEBI is proposing new initiatives to make algos and co-location services more affordable to the masses and level the playing field between professional and retail day traders.
SEBI has proposed that exchanges may provide these facilities as a shared service in the co-location facility, as opposed to each member setting up a server and individually incurring charges. The proposed move has potential to reduce the co-location access cost substantially by more than 90%.
It also proposed that algo orders placed within 0.75% on either side of the last traded price may be exempted from the framework for imposing penalty for high OTR.
Further, the OTR framework may be extended to orders placed in the equity cash segment and orders placed under liquidity enhancement scheme.
Also, the exchanges may be asked to allot a unique identifier for each algo. Presently, one specific code is attached to all algo orders to distinguish them from non-algo trades.
Electronification of the municipal bond market also presents a large opportunity.
The success of Northbound trading showed electronic execution is way forward for the bond market.
Algorithms have become more prevalent in the spot FX market.
Increased electronification has created useable and accessible real-time and historic trade data.
Buy-side firms can discover liquidity more efficiently and execute on Turquoise.