Algo rule changes: brokers tell SEBI to go slow

Pan-India brokers body Association of National Exchanges Members of India (ANMI) has suggested to securities market regulator SEBI that major changes related to algorithmic trading (algo)/high frequency trading (HFT) could be disruptive.

Responding to SEBI’s call for suggestions over the discussion paper on algo and HFT issued in the first week of August, ANMI observed that algo/HFT had become an integral part of Indian markets, an important source of business for brokers who in turn had invested in globally competitive algo capabilities.

“Defining the exact problem to be solved will help all stakeholders to engage,” ANMI submitted.

ANMI suggested that measures which increased complexity in structure and systems would make it harder for retail investors defeating the purpose of equitable opportunity to all participants. It would also increase operational risks for exchanges and participants. It further increased the governance issue for exchanges to prevent “unfair” advantages to any particular participant, ANMI opined.

ANMI called for the use of upgrading surveillance technology to detect misuse of algo trading. It observed that the measure of SEBI’s choice on (algo /HFT) would need to evolve from concept to a detailed design and implementation plan.

On SEBI’s options to ensure equitable access to trading systems of exchanges, ANMI observed that the use of minimum resting time for orders was likely to increase the bid offer spread as it would reduce the number of traders willing to place bids/offers, thereby decreasing liquidity and increasing impact cost. ANMI urged SEBI to further study the concept with various parameters before implementation.

On frequent batch auctions, ANMI said the concept was phased out in Taiwan. The challenges of the concept included inhibition of price discovery, in markets such as India where multiple equities and derivatives co-existed.

It sought clarification on whether tick by tick data would be available to all participants while call auction is under process, the way it was currently done in the pre-open session. In that case, faster participants would have the edge to decide at the last millisecond based upon the flow within the order book, ANMI said.

On random speed bumps being implemented, ANMI said the concept eliminated the basic principle of price-time-priority on which all centralised order book markets were based. This proposal would end up freezing the markets for the duration of each randomisation time interval (1-2 seconds as proposed) and was likely to result in making pricing of derivatives very difficult. Also, the process of generating the “random number” in a computer system was itself the result of a typically complex algorithm, which given sufficient time was not impossible to second guess. So, the entire structure could be abused.

On maximum order message to trade ratio, ANMI said it would force all participants to move towards more liquid contracts, thus making popularisation of new products/markets and exchanges difficult.

On separate queues for orders originating from co-located servers and non-colocated servers, ANMI said the proposal was likely to fragment market access, and create unintentional arbitrage opportunity, likely to lead co-location players to run their algorithms from proximity locations, thereby defeating the purpose of its design. In addition, queues could be bypassed defeating the purpose.

Finally, on review of tick by tick data feed, ANMI said all market participants should have access to these data without any separate charges being imposed, as transparency would be reduced if feed was taken away.