Algorithmic trading in India and its regulation

Here we shall discuss about what is algorithmic trading, its advantages and disadvantages, regulator of algo-trading and measures taken by it.

Algorithmic trading in India 

What is Algorithmic trading, its advantage and regulator ?

1) In financial markets, it refers to transaction orders generated by using advanced mathematical models that involves automated execution of trade.  

2) It uses mathematical models and software codes to make transaction decisions on exchanges and execute them at high speed. 

3) This technology-driven trading enables traders to take advantage of any profit making opportunities arising in the market much before a human trader can even spot them. 

4) Securities and Exchange Board of India (SEBI), who regulates securities and commodities market in India, is responsible for tightening algorithm trading rules to minimize instances of flash crashes.

5) Algorithmic Trading is also called Algo-Trading.

6) What is Flash Crash? [Disadvantage of Algorithmic Trading]
Flash crash results in extremely rapid decline in the price of one or more commodities or securities caused by algorithmic trading.  It can result in the loss and recovery of billions of dollars in a matter of minutes and seconds. 

Many countries and regulators, including the International Organization of Securities Commissions (IOSCO) are debating on this issue for many years, but only India had been able to come out with proper regulation.

7) Measures taken by SEBI to regulate Algo-trading are:

a) Minimum resting time for orders,
b) Speed bumps to delay order processing/matching, 
c) Randomization of orders received during a period,
d) Frequent batch auctions,
e) Maximum order message to trade ratio requirement, 
f) Separate queues for co-location and non-co-location orders,
g) Review of tick by tick data

*Minimum resting time: time between an order received by the exchange and allowed to be modified or cancelled. 

*Frequent batch auctions: Currently stock exchanges are using the continuous-matching system in which buy and sell orders received by an exchange are continuously matched and trades then take place.

Frequent batch auctions would lead to the accumulation of buy and sell orders for a particular length of time, say 100 milliseconds. At the end of every such period, the exchange would match orders received during the interval, thus negating the advantage of superfast machine-based systems. 

*Co-location: Placing computer servers as close as possible to the heart of exchange which helps to execute trade at a rapid rate. SEBI wants to introduce measures that would act as speed brakers.

8) SEBI wants to bring parity between institutional investors using algorithmic trading and those who don't have access to such sophisticated technology.

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