The Securities and Exchange Board of India (Sebi) is expected to put out discussion paper on regulations for algorithm (algo) trading by the end of July proposing a cap on the ‘order to trade ratio’ for brokerages. The objective is to curb the misuse of the mechansim.
Sebi is also expected to propose a mechanism to separate algo orders and non-algo orders on stock exchanges so as to bring about parity between them.
The order-to-trade ratio is the ratio of the number orders placed to the number orders that are traded. Market experts point out that some traders attempt to manipulate prices of stocks which can be prevented by putting a cap on order to trade ratio. “Currently there is no proper mechanism to check the misuse of algo trades and some brokers are able to manipulate trading volumes. The order to trade ratio of some brokers is as high as 5000:1,” observed one trader.
The markets regulator is expected to discuss the issue with the stock exchanges and to come up with a solution to the problem. It is possible the regulator may ask the exchanges to impose a penalty on brokerages that violate the cap.
According to Kunal Nandwani, Founder and CEO of uTrade solutions, placing a cap on order trade ratio is a positive step as long as it preserves liquidity and weeds out manipulative orders.” Rather than using a standard order to trade ratio, regulators should also consider other factors. For instance they could check if orders placed are close to the current bid and ask prices or very different from current rates,” Nandwani added.