Is high frequency trading against retail investors' interest?
Market regulator Securities and Exchange Board of India (Sebi) last week released a paper suggesting steps that it could take to eliminate any unfair advantages high-frequency trading (HFT) over other investors
HFT, a form of algorythmic, or algo, trading, is driven primarily by computer models, which place thousands of orders within seconds to exploit minor discrepancies in stock prices or arbitrage opportunities.
But Deena Mehta, MD of Asit C Mehta Investments, and Kunal Nandwani, Chief Executive of uTrade Solutions, a fintech startup providing algo solutions, say bulk of Sebi's suggestions include slowing down pace of transactions -- a move they say could drive foreign investors to other markets.
"If you don't offer this infrastructure in India; foreign investors will go to Singapore exchange to trade Nifty," Nandwani said. "Why will they come to India if it is slower?"
He added that this wasn't a case of HFTs versus retail traders -- as the latter will not typically be bothered by small disadvantages in prices if the former have a speed advantage.
"Are retail investors bothered if they get a price of Rs 100 or Rs 100.01," he asked.
Below is the verbatim transcript of Deena Mehta & Kunal Nandwani's interview to Reema Tendulkar & Prashant Nair on CNBC-TV18.
Prashant: Will Sebi's proposal level the playing field and more importantly is there a need to level the playing field?
Mehta: I do not know what Sebi is trying to address. However, according to me there are two issues so far as algorithmic trading is concerned.
One, the issue about a section of customers -- maybe retail customers or small time customers -- not getting a level playing field or rather getting left out when it comes to getting their orders executed and when they see the touchline, they are not able to capture the touchline because when they put the order, they get at different prices other than the touchline.
Two, the systemic risk that the algo trading puts on the entire system, for example on a Diwali day, if I remember correctly, the algo misfired and entire trading had to be cancelled, all the transactions had to be cancelled. So what is the kind of risk management mechanism that we have so far as controlling the impact of algo on the market is concerned.
However, what Sebi's paper is trying to do is nothing but slow down the entire thing by saying that we bunch the orders, we keep them and then we release them into the system etc. So, all these measures are slowing down.
Prashant: A basic question, are high frequency firms competing against the average or retail players or against other algo players?
Nandwani: In my opinion high frequency trading (HFT) and algos are helping automate trading, deepen liquidity in the market and achieve tighter spreads. 10-20 years ago, if you were to send an order to the exchange or if you wanted to get a trade done, it took you the whole day and you would know that at the end of the day whether you failed or not or what price did you get.
Today when a retail investor goes to the market, buys share, gets done within a second. It is not by magic. It is by technology behind the depth that is provided by algo and HFT players and they are there for a reason to help match the prices across different investors and help provide the tighter spreads.
Do algos fight the other algos? Yes. Are retail investors bothered if they get a price of Rs 100 or Rs 100.01 or if the price moves [marginally] within a millisecond. Not really. The retail investor's view tends to be long-term. They are not short-term investors. They would buy a share; sell by the end of the day, by the month and by the year.
However, for them having a liquidity, having an order book being able to trade when they want is what they need, which is what is provided by the algo players.
Everybody else, look at fund managers, look at any institutional brokers, look at active traders, all of them have used algorithms to get trades done in a very efficient manner. If a human being can trade once in a second and algorithm can trade 1,000 times a second; there is nothing wrong with it. The market has become faster, the market needs to be faster.
We are living in a global world. Today, if you don't offer this infrastructure in India; foreign investors will go to Singapore exchange to trade Nifty; they will go to Dubai exchange to trade Sensex. Why will they come to India if it is slower, unpredictable and there are the various other challenges that we face within India.