India's biggest brokerage association has asked the country's market regulator to reconsider a plan to slow down computer trading.
The Association of National Exchanges Members of India said in a letter to the Securities & Exchange Board of India that proposals published earlier this month could be disruptive, and urged SEBI to exercise caution. SEBI invited comments on draft guidelines issued on Aug. 5 that suggested a fraction-of-a-second speed bump and alternating trades between different types of orders.
The rules are an attempt by the regulator to address high-speed algorithmic trading in a market that has a large proportion of individual investors and manual orders compared to developed markets. India isn't alone in grappling with modern trading, with authorities in China, Japan, the U.S. and Europe all looking at ways to ensure fair markets. But SEBI's efforts could increase complexity, Swatantra Kumar Rustagi, president of the Association, said by phone.
"ANMI believes that complex systems also increase operational risks and increase governance issues for exchanges to prevent "unfair" advantages," Rustagi wrote in the letter. "Measures that increase complexity in structure and systems will make it harder for the retail participants compared to sophisticated algo traders."
Rustagi also said the proposed random speed bumps eliminate the basic principle of price/time priority on which all centralized order book markets are based.
The regulator's plans also envisage preventing traders from canceling an algorithmic order until it is confirmed by the bourse, to counter the practice of seeing an order show up momentarily before it disappears. But a minimum resting time will reduce the number of traders willing to place bids and offers and would mean higher costs for all participants, Rustagi said in the letter.
Another proposal, limiting order-to-trade ratios, will force traders to move toward more liquid contracts and make it difficult to popularize new products and markets, according to ANMI.
Placing orders without any intention to trade is not "healthy practice," because it is a manipulative strategy that disrupts the markets, SEBI chairman U.K. Sinha said in an interview on July 26. A SEBI spokesman didn't immediately respond to an e-mail seeking comment on the ANMI letter.
Colocation Concerns
The BSE Brokers Forum also raised issues with SEBI's plans, calling for more focus on colocation, the practice of placing a trader's servers next to that of an exchange, rather than trading activity itself.
"The potential for misuse is more in colocation than in algo trading and that needs to be addressed," said Siddharth Shah, chairman of the BSE Brokers Forum. ANMI and the Forum, two of the country's largest brokerage associations together have 1,500 members.
Separate queues for colocated and non-colocated orders will fragment market access and could create unintentional arbitrage opportunities, according to the ANMI letter.
The country's two top brokerage associations earlier this year called for a SEBI investigation into the findings of an advisory panel, which alleged that high-frequency trading firms may have benefited from unequal access at Indian stock exchanges.
"The proposed changes may slow down Indian markets and drive liquidity outside India, putting bigger HFT players at a huge advantage over smaller HFT firms," Dhiraj Bhutoria, a director at Kolkata-based brokerage Varun Tradecom Pvt., said by phone. "SEBI should make colocation and tick-by-tick data feeds accessible at cheaper prices to all participants who think they can benefit from it."
High-frequency and algorithmic transactions accounts for about 40 percent of total volume in India, the highest proportion in the developing world and up from the low single digits five years ago, according to Aite Group, a Boston-based consulting firm.