To allay concern of unfair and inequitable access to the trading systems
The stock market regulator Securities and Exchange Board of India (Sebi) has proposed a slew of measures to tighten existing regulations on algorithmic/high frequency trading (HFT). Sebi has in a discussion paper issued on 5 August 2016 has proposed a slew of measures such as minimum resting time for orders, frequent batch auctions, speed bump mechanism, randomization of orders received during a period, maximum order message-to-trade ratio requirement and separate queues for co-location orders and non-co-location orders. Sebi has invited public comments on these proposed measures by 31 August 2016.
According to Sebi, some of the issue with regard to algorithmic trading that have drawn regulatory attention are its contribution to price volatility, market noise (excessive order entry and cancellation), the cost that high-frequency trading imposes on other market users, technological arms race, limited opportunities for regulators to intervene during high volatility, strengthening of surveillance mechanism, etc. Sebi said its discussion paper on algorithmic trading that it is examining various options to allay the fear and concern of unfair and inequitable access to the trading systems of the exchanges.
One of the proposals to further regulate algorithmic trading is introducing minimum resting time mechanism. Under the minimum resting time mechanism, the orders received by the stock exchange would not be allowed to be amended or cancelled before a specified amount of time viz. 500 milliseconds is elapsed. Resting time is defined as the time between an order received by the exchange and allowed to be amended or cancelled thereafter.
The mechanism of frequent batch auctions would accumulate buy and sell orders on the order book for a particular length of time (say 100 milliseconds). At the end of every such period, the exchange would match orders received during the time interval. This proposal tries to address the problem of 'latency advantage' by undertaking batch auctions at a particular interval. The idea is to set a time interval for matching of orders which is short enough to allow for opportunities for intraday price discovery, but long enough to minimize the latency advantage of HFT to a large extent. Implementing frequent batch auctions will require corresponding changes in the market infrastructure.
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The Speed Bump mechanism involves introduction of randomized order processing delay of few milliseconds to orders. The expected impact of the mechanism is to discourage latency sensitive strategies as such delays would affect HFT but would not deter non-algo order flow for which delay in milliseconds is insignificant. It is understood that the intent behind such mechanism is to nullify the latency advantage of the co-located players to a large extent.
Another mechanism that the Sebi has proposed is randomization of orders received during a period (say 1-2 seconds). As per the mechanism, time-priority of the new/modified orders that would be received during predefined time period (say 1-2 seconds period) is andomized and the revised queue with a new time priority is then forwarded to the order matching engine.
Sebi has also proposed maximum order message-to-trade ratio requirement. A maximum order-to-trade ratio requires a market participant to execute at least one trade for a set number of order messages sent to a trading venue. The mechanism is expected to increase the likelihood of a viewed quote being available to trade and reduce hyper-active order book participation.
The stock market regulator has also proposed separate queues for co-location orders and non-co-location orders. As per the mechanism, separate queues and order-validation mechanism would be maintained for co-location orders and non-co-location orders. Orders from queues will be taken up in the order-book in round-robin fashion.
Another proposal under examination is to provide 'Structured Data' containing Top 20/ Top 30/Top 50 bids/asks, market depth, etc. to all the market participants at a prescribed time interval (or as real-time feed).
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