SEBI to review proposed algorithmic trading regulations

High-frequency trading (HFT) is a type of algorithmic trading that gives users advantage over regular users.

It uses powerful computers and complex algorithms to analyze markets and execute orders based on market conditions at very high speeds.

It is characterized by high turnover rates and high order-to-trade ratios.

HFT turnover in fiscal 2016 has jumped to 42% from 25% in the last four years.

Securities and Exchange Board of India proposed seven norms to regulate HFT.

The rules include: introducing minimum resting time between HFT orders, matching all orders under a batch system, introducing random delays (of milliseconds) in order processing, randomly revising the order queue every 1-2 seconds, capping of order-to-trade ratio, having order queues for co-located servers and other servers, and reviewing the tick-by-tick data feed.

The SEBI's proposed norms on algorithmic trading faced opposition from some users.

They said the rules wouldn't help in reducing HFT's unfair access but rather impact liquidity adversely.

The norms would push the market to the 2005 era of manual trading and increase trading cost.

Another adverse effect would be the migration of foreign investors to other jurisdictions to seek exposure to Indian firms.

The Securities and Exchange Board of India (SEBI) would reportedly begin a second consultation round with market players on algorithmic trading regulations and drop some of its previous proposals.

SEBI had earlier proposed seven norms to level the field between regular market users and high-frequency trading (HFT) users.

However, some users had protested the proposed methods prompting the SEBI to take a second look.

SEBI had proposed revising the order sequence, introduction of minimum resting time between high-frequency trading orders, and uniform access to market data.

Certain market users protested these proposals as they could impact the liquidity of the market and increase the cost of trading.

However, two proposals - capping the order to trade ratio and reviewing tick-by-tick data feed - would reportedly be implemented initially.

By capping order to trade ratio and reviewing tick-by-tick data, SEBI wants to make access to information easier.

The data-heavy feed that gives real-time information on all trades and orders is currently available to HFT users for a fee, but SEBI wants to provide the feed to all players.

SEBI reportedly wants to finalize norms for algorithmic trading based on "sound research" by 2017.