India is considering placing restrictions on algorithmic trading to help check manipulation by traders, people with knowledge of the matter said.
The Securities and Exchange Board of India, the nation’s market regulator, is examining a lock-in proposal that prevents traders from canceling an algo order for a given period of time, the people said, asking not to be identified as they aren’t authorized to speak on the subject. Sebi is evaluating proposals to better manage algo trading, Chairman U.K. Sinha said Tuesday, without elaborating.
Regulators around the world are probing high-frequency trading structures after a series of mishaps and an illegal practice known as “spoofing” convulsed financial markets. In India, the CNX Nifty suddenly fell 2 percent on May 6 amid speculation algo trades sparked a sell-off, triggering closer scrutiny. The rising share of algo orders poses “systemic risks,” the Reserve Bank of India said last month.
“Sebi is trying to make the secondary market infrastructure more robust to check manipulation and rogue entry of orders,” said Abhimanyu Bhattacharya, a partner at Mumbai-based law firm Khaitan & Co. “Their effort is to prevent flash crashes like in the U.S. and human errors.”
High frequency orders worsened the so-called flash crash of May 2010, briefly wiping $862 billion from American equities, when Navinder Singh Sarao helped send the Dow Jones Industrial Average on a wild 1,000-point slide, according to U.S. authorities.
In addition to fraud and manipulation, Sarao was charged with spoofing, all of which he has denied. Spoofing involves tricking other investors into buying or selling by entering one’s own buy or sell orders with no intention of filling them. That creates fake demand that pushes prices up or down.
Global stock markets have become predominantly electronic over the last 15 years as technology costs fell, rules changed and computers that match orders replaced human traders. Algorithms, which buy or sell larger orders in smaller pieces across venues, automated a process previously handled by individuals as the complexity and speed of markets increased.
Sebi had tightened rules earlier as well, months after trading in the CNX Nifty was halted for 15 minutes on Oct. 5, 2012 as the 50-stock measure sank as much as 16 percent. In May 2013, the regulator directed exchanges to double the penalty on trading firms that place a large number of orders that don’t result into actual transactions.
In India, of the total daily equity volume of about $38 billion, including both cash and derivatives, algo trading accounts for about 30 percent, according to the National Stock Exchange.
“The increased complexities of algorithm coding and reduction in latency due to faster communication platforms needs focused monitoring as they may pose risks in the form of increased possibilities of error trades and market manipulation,” the RBI said in the Financial Stability Report published June 25.