Capital market regulator Securities and Exchange Board of India on Friday released a discussion paper to tighten regulations on algorithmic (algo) and high-frequency trading (HFT).
Market participants, both clients and propriety trading by brokers, have adopted algorithmic trading as it provides speed, control and anonymity to the enduser. Further, delegation of decision making to the algorithms has enabled traders to generate large number of orders in a small interval of time, and at the same time, react to opportunities that may exist for fractions of a second.
Among aspects SEBI will examine were random speed bumps and randomisation of orders, according to SEBI consultative paper .
"SEBI is examining various options to allay the fear and concern of unfair and inequitable access to the trading systems of the exchanges," the regulator said in the statement.
The speed bump mechanism involves introduction of randomised order processing delay of few milliseconds to orders. By slowing down HFTs along with everyone else, speed bump mechanism is likely to protect less nimble investors. The mechanism is to discourage latency sensitive strategies as such delays would affect HFT but would not deter non-algo order (such as retail investors) flow for which delay in milliseconds is insignificant.
Latency is the time taken to execute an order from a broker terminal to exchange server.
"It is understood that the intent behind such mechanism is to nullify the latency advantage of the co-located players to a large extent," SEBI paper said.
Algorithmic/high frequency trading has continued to attract the attention of investors and regulators across the world, particularly with regard to price volatility, market noise (excessive order entry and cancellation), cost that high-frequency trading imposes on other market users, technological arms race, limited opportunities for regulators to intervene during high volatility, strengthening of surveillance mechanism etc.
Among the other ideas include , minimum resting time for orders (i.e time taken between an order is received by the exchange and the said order is allowed to be executed or cancelled thereafter), frequent batch auctions (accumulating buy and sell orders on the order book for a particular length of time (say 100 milliseconds) and separate queues for co-location orders and non-co-location orders).
A market observer, based at Chennai, welcomed the move. "The new regulations, if implemented, would curb the high order-to trade ratio, and discourage the practice of placing huge orders without an intention to execute them and will try to negate the advantage of powerful and privileged investors."
SEBI seeks public comments by August 31. “If felt desirable, SEBI may schedule an open discussion session with market participants after receipt of public comments,” it added.