SEBI weighs steps to control algo trading

The Securities and Exchange Board of India is looking at multiple options to regulate algorithmic, or high-frequency, trading in the stock market.

This includes installing a two-queue system, which allows trades by brokers with a co-location advantage (proximity to an exchange server) and another without.

SEBI Chairman UK Sinha told

BusinessLine that such a structure allows orders to go into the system for trading one after another. The other option is to have a lock-in period for algorithmic trades. Both options are meant to reduce trading speed. “We have not yet made up our mind because we are cognizant of the fact that whatever we decide, we must do it carefully. We have also consulted several external experts, but this will take us some more time,” Sinha said.

Algo trades are programmed by computer algorithms and capable of executing thousands of orders in a second. While algo trading has been justified in the marketplace because of the sheer liquidity they provide, they are known to wreak havoc by distorting prices away from the fundamental value of securities. Globally, algo traders have been brought to book for spoofing and quote stuffing — essentially ways of entering orders with no intention of executing them, creating an illusion of demand to get favourable prices.

Acknowledging the challenge, Sinha said, “All over the world, regulators are struggling with how to control algo trading. India was one of the first countries which started the practice of having the algorithm tested by the stock exchange. Also, SEBI has introduced a number of pre-order checks. For example, with size – you cannot have an order of more than ₹10 crore. India was also the first in 2013 to introduce the concept of a monetary penalty for a high order-to-trade ratio.”