The Securities and Exchange Board of India (SEBI) is deliberating to tighten restrictions on algorithmic trading – this could be achieved by levying a congestion charge on traders for a prescribed slab.
The objective behind the proposed move is to ensure that market traders employing algorithmic trading don’t derive an unfair advantage over those traders who do not have access to such technology.
If these proposed restrictions are implemented then the SEBI will be the first regulatory body in the globe to implement such restrictions.
Institutional investors and proprietary desks employ the process of Algorithmic trading or high-frequency trading (via expensive computer models) due to the swift execution process of the orders which can’t be matched by humans and such trading technique serve them to get the best prices.
It is estimated that algorithmic trading constitutes more than 50% out of the total transactions in the cash and derivatives segments in India and the equivalent ratio is more than 85% in developed markets such as United States and United Kingdom.
According to SEBI reports, as of now more than 80 per cent of the orders placed on most exchange traded products are generated via algorithms and 40 per cent of the trades on the exchanges are occupied by such trades.
SEBI has also considered the probability of pronouncing the Maximum order message-to-trade ratio requirements. Maximum order message-to-trade ratio requirements requires a market participant to execute at least one trade for a set number of order messages sent to a trading venue.
The prediction is that such mechanism will be likely to enhance the prospect of viewed quote being available to trade and reduce hyperactive orderbook participation.
Another proposal on radar is the client-level settlement of securities and funds with the objective to protect the interests of the investors in event of the broker gets smashed.
One can hope that with the imposition of congestion charge on algorithm trading and serious implementation of other proposals will prevent use of algorithm trading by certain traders to gain undue advantage over other traders not having access to such technology, reduce the burden on the system by ensuring traders won’t cancel large orders disrupting the follow of capital market at their will like before and ultimately protect the interests of all the stakeholders and stability of the capital markets.
Research and inputs by Paruchuri Baswanth Mohan
About the Author:
Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at firstname.lastname@example.org