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Q. SEBI move on algorithmic trading: Recently SEBI has proposed guidelines for algorithmic trading, in this background discuss how proposed guidelines will impact trading in Indian stock markets.
Aug 13, 2016 Related to : GS Paper-3

Ans :

Introduction-

Algorithmic trading, (also referred as automated trading/black-box trading/algo-trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. Algorithmic traders automate trading decisions based on preset rules or strategies.

Issue-


Recently Security Exchange Board of India proposed ways to slow down high frequency trading. It is examining various options to allay the fear and concern of unfair and inequitable access to the trading systems of the exchanges.

SEBI’s proposal-

  • The SEBI has proposed seven new ways to level the playing field between those using high frequency trading (HFT) systems and regular market users.
  • It calls for the introduction of a minimum resting time between HFT orders.
  • It has suggested matching orders under a batch system.
  • It wants to introduce random delays of a few milliseconds in order processing.
  • It has proposed that the order-to-trade ratio be capped.
  • SEBI is considering the idea of having separate queues for orders coming from co-located servers and those from other servers.
  • SEBI also wants to review the tick-by-tick data feed.

Analysis-

  • Recently released discussion paper by SEBI on algorithmic stock trading rightly calls for a set of prudential norms and practices so as to have a level playing field for capital market participants irrespective of their technological savvy or financial strength.
  • The paper has called for a minimum resting time, the interval between order receipt at the exchange and its amendment or cancellation, of 500 milliseconds, which is unexceptionable.
  • About 80% of the orders placed on Indian stock markets are already by way of algo trading.
  • It makes for rapid assimilation of price information, but can accentuate ‘flash crashes’, hence non-algo traders are put at a slight disadvantage. In this background the proposed move by SEBI are more sensible.

Conclusion-

The proposed plan by SEBI is to provide structured data to all market participants so as to further reduce information asymmetry and nudge them towards a more efficient market. Random speed bumps of several milliseconds may barely delay algo orders but such pause may be vital to avoid unnecessary overload of the order-matching engine. In this background such move is welcome is to revamp order queues.


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