High-speed trading backlash mounts pressure on Sebi

The Securities and Exchange Board of India (Sebi) is coming under increased pressure to improve its oversight of high-speed trading after allegations of unfair access at the nation's biggest equity bourse.

The country's top brokerage associations are among a growing chorus of voices calling for Sebi to take action after an investigation by one of its own advisory panels claimed that there may have been collusion between the National Stock Exchange of India and a high-frequency trading (HFT) firm. The panel is pushing for Sebi to frame more detailed rules on HFT and punish anyone found of wrongdoing, according to a person with direct knowledge of the matter.
 

Sebi's public silence on the internal report's findings - which were reported by Bloomberg and local media this month - has added to a sense of frustration among many local brokers and investors who say that insufficient regulations on high-frequency trading have made India's markets vulnerable to abuse. While Sebi has issued broad guidelines dating as far back as 2012, critics argue they don't do enough to address how traders should connect to exchanges and how orders should be processed.

"India doesn't have formal rules for HFT," Vaibhav Sanghavi, a managing director and portfolio manager at Ambit Investment Advisors, which runs India's only onshore long-short fund that has Rs 1,000 crore in assets, said in an interview. "Sebi will have to get proactive."

The regulator is discussing what steps to take with the Technical Advisory Committee, said the person with direct knowledge, who asked not to be named because the discussions are private. Sebi hasn't decided on its response, the person said.

While Sebi Chairman U K Sinha met with brokers in Mumbai on April 21, he didn't comment directly on the panel's findings, saying only that Sebi will ensure a "level-playing field," according to Swatantra Kumar Rustagi, president of the Association of National Exchanges Members of India, who attended the meeting. The rising share of algorithmic orders poses "systemic risks," the Reserve Bank of India said last year.

Sebi didn't reply to e-mailed questions. An NSE spokesman didn't respond to an e-mail seeking comment. The bourse will in the coming weeks submit a detailed report to Sebi to counter claims that high-frequency traders gained unfair access, people with knowledge of the matter said this week.

First-Come, First-Served

The report by the Sebi's advisory panel, which hasn't been released, said that between 2012 and 2014, NSE handled orders to trade on a first-come, first-served basis, a design that made it prone to abuse. The panel, whose work was prompted by claims from an unidentified whistle-blower, said it didn't have enough information to determine whether NSE officials colluded with traders to give them preferential access, and called for Sebi to investigate further.

Sebi joins its global peers, including the US Securities and Exchange Commission, in facing criticism for being slow to address alleged abuses by HFT firms.

"The situation here is no different from the one prevailing in the developed markets, where HFT has come in for similar criticism," Deven Choksey, managing director at brokerage K R Choksey Shares & Securities Pvt, a member of the NSE and BSE Ltd, India's second-largest exchange.

Steep penalties

Sebi has taken some steps to govern computerized trading. The regulator has guidelines that stipulate that brokers offering algorithmic trading facilities must get their systems audited every six months. The watchdog also fixed steep penalties on trading firms that place a large number of orders that don't result into actual transactions.

Yet, market participants say some aspects of HFT are still too lightly regulated in Asia's fourth-biggest stock market. The regulator doesn't have rules on how lines should connect high speed traders to their colocation facilities and exchanges or how to distribute and process orders sent to exchange servers, critics say.

ANMI and the Brokers Forum, two of the country's largest brokerage associations which together have 1,500 members, are calling for a formal investigation into the panel's findings. Sebi is planning to hire an external agency to advise it on ways to minimize risks in HFT trading, Mint reported Thursday, citing two people it didn't identify.

"If unfair access has been granted to some brokers then clearly that is very concerning," Derek McCole, head of dealing for Asia Pacific at Aberdeen Asset Management Plc, which oversees about $428 billion, said in an e-mail. "We can live with HFT as long as there is a level playing field and no preferential treatment for faster data."