SEBI to review high frequency trading risk management

Our Bureau New Delhi | Updated on November 15, 2011

The SEBI Chairman, Mr U.K. Sinha (left), with the Managing Director and CEO, National Stock Exchange of India, Mr Ravi Narain, at the 6th ANMI International Convention in the Capital on Tuesday. - Ramesh Sharma

The stock market regulator, the Securities and Exchange Board of India (SEBI), said that it will do a thorough review of the risk management system in high frequency or algorithmic trading. Such an exercise aims to stop repetition of the Muhurat trading mishap on the Bombay Stock Exchange (BSE).

On October 26, the BSE was forced to annul all the derivatives trades. It said that it observed large movements in Sensex futures during the special session, conducted as Muhurat trading, for Diwali. This has again raised the question of risk management measures in high frequency trading.

‘Ready to review'

Addressing the sixth international convention of Association of National Exchange Members of India, the SEBI chairman, Mr U. K. Sinha, warned that some members are alleged to be involved in the manipulation. But the regulator would not let anybody to mess with the system. “We have an effective risk management system, but we would not compromise. That is why we are ready to review,” he added.

Review would consider changes in the margin system as well as capacity to take the trades. The secondary market advisory committee, in its meeting on November 11, did discuss the matter. The SEBI chairman indicated that some decision is expected very soon.

Algorithmic trading system uses very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause least amount of impact on a stock's price.

Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.

Securities Transaction Tax

The SEBI chairman endorsed the concerns of the trading community that trading costs, of buying and selling shares, have gone up. “Time has come to re-look. SEBI is in dialogue with the Government, which will take steps at an appropriate time,” he assured.

The Finance Ministry is working on a proposal to reduce the Securities Transaction Tax (STT), which is levied on buying and selling of shares in the cash and the derivatives markets. At the same time, the Ministry plans to amend the Stamp Duty Act to have a uniform duty nationwide.

IPO Market

Mr Sinha said that the regulator was closely looking at pricing of initial public offerings (IPOs) and will take action if it came across instances of manipulation. There are allegations that promoter-broker nexuses try to book heavy profit on the day of listing.

Published on November 15, 2011

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