The Bombay Stock Exchange (BSE) has started giving time stamps on its broadcast messages, a requirement mandated by the capital markets regulator for smart order routing (SOR). A time stamp details the date and time of the order and is important for audit trails.
BSE did a mock trading session for this on Saturday and went live on Monday, according to an exchange circular. SOR began to be offered by BSE at the start of this month; the rival, National Stock Exchange (NSE), began earlier. NSE also offers a time stamp already.
SOR is used for algorithmic trading and allows brokers’ trading engines to systematically choose the execution destination between different exchanges. These are based on factors such as price, trading costs, speed, likelihood of execution and settlement, size, nature or any other consideration. In India, brokers’ software would be able to choose between BSE and the NSE.
Foreign institutional investors (FIIs) are increasingly availing of the SOR facility, which helps them get the best price for their transactions across exchanges. Within a few days of its launch, Deutsche Equities, JP Morgan and Credit Suisse have taken a lead in using SOR to execute orders on both BSE and NSE. Goldman Sachs, Citi Group and a host of other FIIs are also using SOR.
Use of SOR is widely believed to help deepen the derivative segment and bring down the concentration of volumes on a particular exchange. It would also decrease the arbitrage opportunity. Currently, NSE generates an average daily turnover of nearly Rs 1,00,000 crore in equity derivatives.
In August, the Securities and Exchange Board of India (Sebi) had issued detailed guidelines to stockbrokers and exchanges on what was expected of them in SOR. Brokers were advised to apply to exchanges, present a third-party systems audit, provide features of the system and undertake to provide routing in a neutral manner.
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Exchanges were asked to approve or disapprove applications for SOR within 30 days and ensure adherence to best execution policy, audit trails, providing unique identification number for transactions with a time stamp and other safeguards.
Sebi has told exchanges to make the necessary changes in their bylaws, disseminate the provisions and report on implementation in their monthly reports.