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After a year of suspension, the Forward Markets Commission (FMC) has allowed the introduction of algorithmic (algo) trading in micro and mini contracts, to attract participation from small traders. Some conditions have been specified.
Around 95 per cent of the volume generated in this segment was through bulk orders and the regulator feared misuse of the technology was driving automatic trade orders. This resulted in suspension of algo trades in the micro and mini segment from January 1, 2013.
The reversal comes after the cumulative turnover of commodity exchanges fell 36 per cent in the first nine months of the current financial year and stakeholders consistently made efforts to widen the horizon of participants.
“This is a welcome move and will help in the development of the commodity market,” said Ashok Mittal, chief executive of Emkay Commotrade.
Micro and mini contracts are active on leading commodity exchanges in small trading lots, to allow the benefits of futures trading for small and marginal traders, who cannot order large-size contracts. Such contracts, however, failed to attract the latter, due to lack of awareness and the necessary technology.
The circular said it had got suggestions from market participants and exchanges. After examining these, in consultation with the advisory committee on technology, it was decided to revise the guidelines.
The algorithmic orders entered and/or modified within one per cent of the last traded price of the respective contract shall not be included in the calculation of the order-to-trade ratio for the purpose of arriving at the penalty for a high order-to-trade ratio. More, the penalty structure will be applicable for only those members who have placed 10,000 orders or more in a day.
“Allowing algo in micro and mini contracts will create arbitrage opportunities for participants, which will also result in higher volumes and liquidity in these contracts, beneficial for small retail investors. The impact cost comes down and they can easily enter or exit the contract,” Mittal added.
The limit of 20 orders per second from a particular user identity number shall be measured over a rolling period of five seconds (i.e. 100 orders for zero-five seconds, 100 for one-six seconds, 100 for two-seven seconds and so on). The regulator clarified the system audit for algo trading shall be undertaken by a system auditor empanelled by the exchanges. More, the capacity of the trading system of the exchange should be at least four times the peak order load encountered and the exchange system should be upgraded regularly.
“Algo trading is allowed in micro and mini contracts except silver 1,000 and gold petal. It was done to boost volumes in commodity markets and is a step in right direction,” said Sugandha Sachdeva, assistant vice-president, Religare Securities.
In partial modification of its earlier order, the FMC had in July allowed algo trading in 100g gold contracts.
