The Securities and Exchange Board of India (Sebi) has formed separate committees to look into issues related to algorithmic trading?popularly known as algos ? and the current margin system in the cash and derivatives segment. The move comes close on the heels of the regulator raising an alarm on the risk management systems related to algos that use complex mathematical tools to execute trades on the stock exchanges. Incidentally, algos have been regularly blamed for any kind of sudden market crash across leading stock exchanges of the world.
?We have formed a group that is working on algos and have also asked the stock exchanges for detailed checks and balances,? Sebi chairman UK Sinha told FE on the sidelines of a recent investment conference. It is believed that the regulator has already circulated a draft note with the stock exchanges. The four-member technical advisory committee is headed by S Sadagopan of the International Institute of Information Technology, Bangalore. The members include Ashok Jhunjhunwala from IIT Madras, H Krishnamurthy from Indian Institute of Science, Bangalore and Vibhakar Bhushan of Trignon Business Consulting.
The panel will advise Sebi on framing appropriate policies arising out of technological advancements in areas like wireless trading, co-location, algorithmic trading, smart order routing and application programming interface.
This is not the first time, however, when the regulator has voiced its concerns on algos that contribute nearly half of the daily market turnover in the US. In India, the share of such electronic trading is still considered to be marginal though most institutional investors, including mutual funds and insurance players, have started embracing algos.
?Though Sebi is yet to come up with a risk management system for these products, we want all the players to have their own risk management systems in place,? Sinha said in November.
Sebi has also formed a separate 10-member committee to review the risk management framework and the margin system in the cash and derivatives segment. The risk management review committee (RMRC), which was formed last week, is headed by JR Verma of IIM Ahmedabad and comprises representatives of stock exchanges, clearing corporations and broking houses.
Interestingly, brokers have been asking for a review of the current margin systems, which, according to them, have pulled investors away from the equity market to commodities.
?The different margin requirements of the equity and commodity segment have distorted the market,? says Naresh Maheshwari, president, Association of National Exchanges Members of India (ANMI).
?With the same amount of capital, the quantum of position one can take in commodity futures is significantly higher than that allowed in the equity derivatives segment. We have taken up this issue with the finance ministry and the regulator,? he added.