Almost 20 months after a Singapore-based trader wrote to an official at the Securities and Exchange Board of India (Sebi), alleging manipulation in the co-location (Colo) centre of one of the exchanges, the regulator has put out a detailed consultation paper on 'Strengthening of the regulatory framework for algorithmic trading & co-location'.
Importantly, the paper officially confirms the extent of proliferation of such trades in our market. "Currently, more than 80 per cent of the orders placed on most of the exchange-traded products are generated by algorithms and such orders contribute to approximately 40 per cent of the trades on the exchanges."
The paper reiterates that "fair, transparent and non-discriminatory access" is one of the key pillars of a safe and vibrant capital market. "As some market participants across the globe have highlighted the concern of unfair access and inequity to the non-colo/non-HFT (high frequency trading) participants vis-a-vis the participants that use trading algorithms and co-location to trade, securities market regulators are examining various proposals to address such concern."
The paper does not make any direct references to the whistleblower's letters. In all, the anonymous trader wrote three - first in January 2015, then in August 2015 and October. But, the regulator says "it is examining various options to allay the fear and concern of unfair and inequitable access to the trading systems of the exchanges".
The paper seeks comment on seven broad measures. Namely, minimum resting time for orders, Frequent Batch auctions where sell and buy orders are bunched for a specific time period, random speed bumps, randomisation of orders, a maximum order-to-trade ratio requirement, separate queues for colo and non-colo orders and review of tick-by-tick data feed.
Some of the moves it has sought comments on do not have any precedent anywhere in the world. For example, a minimum resting mechanism for orders. This would ensure those placed by algo traders are not fleeting and disappear before others could act on these. The regulator is also contemplating measures to discourage latency-based strategies by introducing speed bumps.
To summarise, all these moves are either aimed at reducing the latency advantage the algo and colo traders were enjoying so far or to bring down the information asymmetry. Sebi's moves appear well-meaning but the pace seems a bit too slow. By the time, these steps are eventually put in place, would the HFT wizards have moved forward? Maybe we should ask the whistleblower again.
Another important and much overdue development last week was the launch of sachet.rbi.org. Peddled as a website for 'scams', the portal is run by the State Level Coordination Committee (SLCC).
SLCCs are the joint forums formed in all states to facilitate information sharing among the regulators, viz, RBI, Sebi, Irda, NHB, PFRDA, registrar of companies etc, and the enforcement agencies of the states, viz, home department, finance department, law department, police's economic offences wing, etc. The objective is to check unauthorised acceptance of deposits by unscrupulous entities.
Just timely reporting and coordination between these various arms would help prevent many a small fry from becoming a big ponzi whale. The portal is easy on the eye and has good inter-active features. If used well, this could be a key weapon in fighting the illegal investment schemes menace. One Bijay Samant had an interesting question posted on Aug 5, at 4:56 pm, which we reproduce, without editing: "I want to know that is it Sahara India legal or not. Because even now its agent collection money many city and its office open also. So guide me is Sahara India company is legally licenced company or not? (sic)."
