Sebi concerned about algo trades, puts regulations in place

Sebi does not want to take any chances with the high-speed, high-risk algorithmic trading. The market regulator has come out with an extensive set of guidelines that puts the onus on stock exchanges to regulate such trades. Sebi has also put in place additional safety measures including routing all algo trades via servers situated in India, report Sajeet Manghat and Ashmit Kumar of CNBC-TV18.

On March 9, a very apprehensive chairman of Sebi, UK Sinha, questioned the ability of the stock exchanges or the Sebi itself to regulate algo trade in India. From 200 microseconds, India now trades at 20 microseconds with a time-lag of 8 microseconds, but demands are that it still goes down.  “At some stage, it has to stop. We have to ask ourselves what can we gain in 8 microseconds of trade that we can’t in 20 microseconds” 

After the debacle on Diwali on the BSE, Sebi has been working closely to bring guidelines to control rouge algorithmic trading. Today, it released broad guidelines based on the recommendations of the technical advisory committee.

It says that the onus is on stock exchanges to ensure that their systems can manage the load. Stock exchanges will put in place economic disincentives with respect to high daily order to trade the ratio of algo orders of brokers. Also, all algo trading will need to be routed through servers of brokers situated in India.

Additionally, stock exchanges will ensure minimum order-level risk controls which includes price checks wherein the price does not violate the price bands. And for stocks where price bands don't exist, dummy price bands will be put in place.

Stock exchanges will also ensure quantity checks. In a significant move, the exchanges are asked to manually enable the terminals of the brokers whose terminal are disabled upon exhaustion of collaterals. The exchanges will synchronise its system clock to atomic clock to precision of one microsecond and accuracy of plus or minus one millisecond.

Of course, all algo trading by brokers will need approval of the stock exchange.

As part of the risk controls, Sebi says not more than 25,000 shares or 0.5% of the equity of the company will be allowed to be executed in one order. The exchange will also ensure that dysfunctional algo are disabled in the systems.

Currently, it is estimated that algo trading is done by 100-200 brokers on both the exchanges. While this has taken the Indian markets at par with global markets, it has also exposed the system to trade risks.