India’s securities watchdog may tighten algo trading rules

MUMBAI (Reuters): India’s capital market regulator said on Friday it was considering tightening rules for algorithmic trading, citing concerns about fair access to markets.

The Securities and Exchange Board of India (SEBI) said it was looking at various potential limits on so-called algo traders, including imposing “random speed bumps,” which would randomly delay execution of some orders.

The regulator is also looking at introducing order randomisation, a process that would mean trades are settled on a random basis and not on a first-come-first-serve one.

In India, algorithmic trading, like elsewhere around the world, is becoming a bigger part of daily trading, prompting regulators to question whether investors with no access to this rapid form of trading are being disadvantaged.

SEBI said that algorithimic orders now account for around 40% of trades executed in exchanges in India.

“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.

Among other proposals under consideration, SEBI said it would look at ways to promote fair access, including forcing exchanges to take orders from co-located servers and orders from other sources on an alternate basis, effectively giving equal weighting to both.

India’s two biggest exchanges National Stock Exchange and BSE Ltd offer so-called colocation services to algorithmic traders, allowing them to place servers next to an exchange and thus giving them speedier access than other investors.

SEBI said it could also require a gap between when an order is placed and when it is amended or cancelled, addressing an algo strategy that involves placing and then cancelling orders in quick succession which can move markets.

The regulator also could examine “frequent batch auctions” – in which exchanges would collect orders for a period of time and then execute them as a group rather than matching them at the moment they receive them.

Broker associations have been calling for tighter regulations on algorithmic trading saying retail investors were being disadvantaged by their rapid-fire trading strategies.

But algorithmic traders said SEBI’s measures, if introduced, would be too restrictive and could potentially dent liquidity in India and drive trading to offshore exchanges.

“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,” said Kunal Nandwani, head of uTrade Solutions, which offers multi-asset trading platforms for investors.

SEBI asked market participants to submit comments by 31 August.