GS Paper II –Important aspects of governance, transparency and accountability, e-governance- applications.

SEBI to tighten algo trading rules

What’s Happening-
The Securities and Exchange Board of India (SEBI) plans to further tighten the regulations for algorithmic trading to minimise instances of misuse of such systems that can be used to execute complex trading strategies at a very high speed.

Key Points discussed were:

  • India was one of the few countries in the world to regulate algorithmic trading — popularly called algo trading.
  • SEBI, the market watchdog, is looking to further strengthen the norms so that instances of flash crashes that have happened overseas, and also in India a few times, could be minimised.

For instance

  1. SEBI have provided for high order to trade ratio penalty system.
  2. SEBI reviewing whether that penalty should be enhanced further.
  3. while many countries and regulators, including the International Organization of Securities Commissions (IOSCO), have been debating on this issue for many years, only India had been able to come out with proper regulations.
  • Regulatory body has tried to bring transparency and consistency in its own actions against entities indulging in market malpractices while cleansing the market by providing an exit option to regional stock exchanges and delisting non-compliant companies.

Why InvIT and ReIT not launched?

  • Mr. Sinha said that the one regret he has is that not one Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) was launched while he was the chairman.
  • He, however, added that he expected these to be unveiled in the next two months.
  • The reason why it has not been launched is not because of SEBI. It has something to do with other regulators because they have to take some decisions about allowing their regulated entities to participate in InvIT and REITs market.

Algorithmic trading refers to the use of software programmes to execute trading strategies at a much faster pace.
On the National Stock Exchange (NSE), algo trades accounted for close to 16% of all trades. On the BSE, it was 8.56% in January.
They were developed so that traders do not need to constantly watch a stock and repeatedly send those slices out manually.
Popular “algos” include Percentage of Volume, Pegged, VWAP, TWAP, Implementation Shortfall, Target Close.
In the past several years algo trading has been gaining traction with both retails and institutional traders.

Sources- The Indian Express, The Hindu. Page 20