Sharing of co-location facilities for algo trading and introduction of physical settlements for derivatives are the two key decisions market regulator SEBI took at its board meeting on Wednesday.
While physical settlement was necessary to balance cash and derivative market volumes, the need for rationalisation of co-lo facilities was felt after the National Stock Exchange fiasco .
SEBI has accepted most of the recommendations of the Uday Kotak committee, which was set-up to review corporate governance norms of listed companies.
Two decades after it first introduced equity derivatives in India, SEBI has announced the introduction of a ‘physical settlement’ for the segment.
‘A good beginning’
After the board meet on Wednesday, SEBI chairman Ajay Tyagi said introduction of physical settlements could bring some much-needed balance between the equity cash and derivative segments.
“Physical settlement is a good beginning. But it should be across the board, without limiting it to exposure or the size of the company. This will bring down manipulative speculation and volatility in markets,” said Deven Choksey, founder and promoter, KR Choksey Investment Managers.
Physical settlement in derivatives is nothing but settling of a trade by give and take of shares rather than cash. Even though SEBI has announced physical settlement, it may not be implemented on all the stocks in the derivative segment. To start with, derivative traders in only those stocks that have a low free-float stock or marketwide position limit of less than ₹500 crore may be settled via give and take.
As per SEBI’s criteria, very few stocks could be available for physical settlement and most of the widely traded stocks will be out of the purview of the new rule, experts said. SEBI, however, wants to introduce the new norm in a phased manner.
Co-location facilities
The market watchdog has also allowed traders to share co-location facilities as it tries to address concerns on high-frequency algorithmic trading. SEBI said shared co-location services will reduce cost for trading members operating from the facility. “This will reduce cost for brokers and address concerns of unfair access,” SEBI Chairman Ajay Tyagi said in a conference after the board meet.
Stock exchanges have also been asked to provide a tick-by-tick data feed for free to all market participants. This type of data feed is crucial as it can be used to construct a market trend.
It is believed that algo traders intentionally clog the system with large orders to confuse the wider market. SEBI’s decision on co-location facilities comes 18 months after it had floated a discussion paper on the issue. Algo trades are nothing but high-speed computer trades using complex algorithms.
SEBI has directed stock exchanges to allot a unique identifier to each algorithm to establish an audit trail, which will help in surveillance.
MF blues
Separately, the mutual fund industry will be hit hard by SEBI’s new diktat to reduce the maximum additional expense charges from 20 basis points (bps) of a scheme to just five bps.
Experts say most mutual funds used these expenses to pay to their fund distributors.