The Reserve Bank of India has said volumes related to algo orders give rise to concerns related to systemic risks.

The share of algo orders in total orders and the share of cancelled algo orders in the total number of cancelled orders is around 90 per cent.

Systemic risk is the risk of an entire financial system disintegrating due to a contagion spread as the result of default of a few entities within the system. The global credit meltdown of 2008 is an example.

RBI observed that volumes in algo trading and high frequency trading (HFT) increased substantially in the cash segment of the equity market to about 40 per cent of total trades in both the exchanges in March 2015, from 17 per cent (NSE) and 11 per cent (BSE) of trades, respectively, in 2011.

Keep pace with complexity A report by the Senior Supervisors Group (SSG — a group of 10 supervisors from Canada, France, Germany, Spain, Netherlands, Italy, Switzerland, the UK, Japan and the US that assesses risks associated with algorithmic trading and identifies risk-based control principles) on April 30, has suggested higher levels of controls to mitigate systemic risk.

SEBI keeps a close watch on the developments to formulate appropriate policies based on recommendations by the SSG.

RBI added that there have been certain instances of abnormal market movements in Indian stocks which have been attributed, by market experts, to algo trading/HFT. Some of these episodes, though are explainable with factors other than algo trading/ HFT, RBI said.

SEBI’s measures SEBI had tightened controls on its circuit breaker mechanism in January this year in addition to the existing coordinated trading halt in all equity and equity derivative markets nationwide on 10 per cent, 15 per cent and 20 per cent movement either way of the Sensex and the Nifty.

SEBI directed the NSE and the BSE to compute the Nifty and the Sensex after every trade in the index stocks and check for breach of market-wide circuit breaker limits after every such computation of the index. It directed the exchanges to stop matching of orders to bring about a trading halt and purge all unmatched orders in case of a breach of market-wide circuit breaker limit.

SEBI also directed the BSE and the NSE to ensure that all messages related to market-wide index circuit breakers be given higher priority over other messages.

It added that the systems, including the network for computation of market-wide index, checking for breach of circuit breaker limits and initiating message to stop matching of executable order and acceptance of fresh orders, should not be used for any other purpose.

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