1. Curbs on algo trade detrimental to market liquidity: FIA

Curbs on algo trade detrimental to market liquidity: FIA

A global trade organisation for derivatives, has asked regulator Sebi to reconsider proposed curbs on superfast algorithmic trading, saying such measures could be detrimental to market liquidity and increase costs for investors.

By: | Published: September 8, 2016 6:02 PM
Sensex, Nifty, BSE, NSE

Algorithmic trading or ‘algo’ in market parlance refers to orders generated at a superfast speed by use of advanced mathematical models that involve automated execution of trade, while co-location involves setting up servers on the exchange premises. (Photo: Reuters)

A global trade organisation for derivatives, has asked regulator Sebi to reconsider proposed curbs on superfast algorithmic trading, saying such measures could be detrimental to market liquidity and increase costs for investors.

In a letter to Sebi, Futures Industry Association (FIA) said it is concerned that some of the proposals of the regulator may not necessarily achieve the regulatory objectives.

“Instead the proposals may lead to unintended consequences for India’s markets including potentially detrimental impacts to market liquidity, increased risk and increased trading costs for investors which outweigh potential regulatory benefits,” it added.

Algorithmic trading or ‘algo’ in market parlance refers to orders generated at a superfast speed by use of advanced mathematical models that involve automated execution of trade, while co-location involves setting up servers on the exchange premises.

The response comes after Sebi last month proposed to introduce resting time for orders, random delays and random speed bumps, separate queues for co-location and non co-location orders for strengthening the regulatory framework for algo trading and co-location facility. The regulator has sought public comments on the proposal till August 31.

Besides, stock brokers’ forum Association of National Stock Exchanges Members of India (ANMI) has also opposed the idea of any restrictions on algo trade, while BSE Brokers Forum has supported the idea.

Regarding the proposal of minimum resting time for orders, FIA urged Sebi to reconsider any possible for introduction of such plan to minimise increased market risk.

“Imposing such a requirement would have considerable detrimental impacts on market structure and the natural price discovery process as a result of increasing the cost and risks associated with providing liquidity to the marketplace.

“This may lead to wider spreads, decreases in market liquidity and increased trading costs for underlying investors,” it said in a letter written late last month.

With regards co-location, FIA said if it is not permitted, there could be a rush to acquire real estate in and around exchange data centres. Ownership of and access to those sites could then potentially yield unequal outcomes.

A global trade organisation for futures and options said introduction of separate queues and order-validation processes for co-located and non co-located orders would introduce an unnecessarily level of complexity to the trade matching process as well as exchange systems

“We encourage Sebi to undertake further detailed analysis into any proposed market structure changes and potentially implement pilot programs for any proposed measures,” FIA said.

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