Market regulator Sebi today called for putting in place a system to ensure safeguards in high frequency 'Algo' trading which is prone to information asymmetry and thus increased volatility in the overall market.
Algorithmic or 'algo' trading refers to orders generated at super-fast speed by using advanced mathematical models that involve automated execution of trade, and is mostly used by large institutional investors.
"We have ensured risk management measures in algo trades. We also need to have systems of safeguards for algo trades... "Because though it is believed that algo trading reduces frictions in the market thereby benefiting liquidity, it can also increase information asymmetry for slower trades," Sebi Chairman U K Sinha said at the first two-day international conference on high frequency trade, algo trading and co-location, organised by Securities and Exchange Board (Sebi).
The seminar will discus the challenges posed by algorithmic or high frequency trade. He also said there was evidence that algo trading can improve market liquidity but at the same time also increases volatility.
"In algo trading, there is both excitement and fear. High frequency trades in extreme situations could lead to wiping of orders. "In global markets, we saw USD 1 trillion market cap was wiped out in one single day due to a wrong trade. As a result, we also saw one stock falling 99 per cent while another stock of USD 34 touching USD 99,999," Sinha said.
He said, "As the race for super-fast trading will only increase going forward, we have to ensure that the regulator, the exchanges and brokers must put in place some safeguards so that investors are assured of protection". He also said as every technology has advantages and disadvantages, we must minimise accidents.
"There is a need for safeguards both at the exchange and trader levels. The job of regulator has never been pleasant, especially towards securities market and faces pressure from various segments and we make sure that everything is in order," Sinha said.
He pointed out that the tolerance level both in the country as well as abroad for honest mistake is coming down.
"We also found that increasing tendency is to place orders by super-fast advanced mathematical analysis and it is also capable of executing orders. As HFT leaps to multi-asset classes with multi-pronged strategies, it is expected that market efficiency gets a boost," the Sebi chairman said.
"A few years ago, 30 per cent of trading was in HFT in the US but today it is around two-thirds. In Europe also it is on the rise. Back home around 20 per cent trading is through Algo trading today.
"Today investors are looking for brokers who can offer high speed trading platform. They are getting carried away by commercial interest in getting higher speed and new frontier is no longer mili-seconds or micro-seconds, but we are moving to nano-seconds. Where will this race going to end?" he said.Stating that Sebi is not against technology and innovation, Sinha said Sebi's objective is to have a mechanism to assure ourselves and the outside world that the larger system is alert and has enough safeguard and not against innovation and technology.
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