SEBI May Tighten Regulations For Algorithmic Trading In India

India’s securities regulator, the Securities and Exchange Board of India (SEBI) has said last week that it is considering increasing regulations for algorithmic trading in the country. The regulatory body stated that it was considering various limiting measures such as random speed bumps to delay order execution and order randomization which would settle orders on random rather than the current first-come- first-serve format as a part of a new framework for algo trading.

With the increasing adoption of this form of trading, many market participants fear that those with no access to algo trading will be at a disadvantage.

According to SEBI, algorithmic trading currently forms around 40 percent of orders executed right now in India. It said that it is looking at ways to ensure that there is no unfair access to the systems of the exchanges. SEBI is considering processes to ensure that exchanges give equal weightage to all forms of trading including requiring exchanges to take orders from co-located servers and other sources on an alternate basis.

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The National Stock Exchange and BSE Ltd, the two biggest stock exchanges in India offer algorithmic traders the option of co-locating their servers near the exchange to enable speedier access to the exchanges.

SEBI said it is also considering requiring a gap between placing an order and its cancellation to counter the algo strategy where an order is placed and then cancelled in quick succession which has the ability to influence the market. Also being considered is the introduction of frequent batch auctions where exchanges collect orders over a period of time and then execute them in a single batch rather than executing them as they come in.

Broker associations have been asking SEBI for long to introduce limiting measures on algorithmic trading since they claim that it affects retail investors, many of whom have no access to this advanced form of trading. Algorithmic traders, also known as algo traders say that such measures would hamper the development of algorithmic trading in the country. It might even result in trading moving to offshore exchanges if the restrictions are too repressive.

In a statement, Kunal Nandwani, head of uTrade Solutions, which provides multi-asset trading platforms said,

If they want to make a change, they must also consider how much market impact there will be in terms of reducing liquidity and also that various foreign investors will have more reason to go to alternate venues

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