The Securities and Exchange Board of India, the country's primary regulator of financial and commodity markets, is considering a wide range of measures to restrict high-frequency trading.
In a discussion paper issued in August, SEBI explained that automated trading now accounts for 80% of orders submitted to Indian exchanges and around 40% of the trades, and said it is examining these measures "to allay the fear and concern of unfair and inequitable access to the trading systems of the exchanges."
The discussion paper asked for feedback on several changes to the methods that exchanges use to process trades, including minimum resting times for orders to prevent rapid-fire cancellations, frequent batch auctions as an alternative to continuous markets and "random speed bumps" that would delay the execution of some orders in a non-predictable way. SEBI also said it is looking at separating orders transmitted to exchanges through colocation centers from other orders and requiring exchanges to process them separately.
On Aug. 31, FIA submitted a response to SEBI commenting on several of the proposed measures. FIA stressed the importance of establishing risk controls designed specifically for electronic trading and encouraged SEBI to consider the detailed risk control recommendations put forward by FIA in several recent white papers. FIA also urged SEBI to reconsider measures that restrict the ability of market makers to adjust their pricing, saying this would lead to reduced liquidity and higher costs for investors. A better approach, FIA said, would be to work with exchanges to improve surveillance and establish appropriate risk controls to prevent market disruptions.
FIA also urged SEBI to carefully consider the consequences before attempting to change market structure, and warned that even small changes can have wide-reaching effects.
"Market structure considerations, including the mechanics of matching trades, are complex," FIA said. "A seemingly small change in market structure can result in significant negative and often unintended consequences and costs. Trading venues are uniquely positioned to evaluate the efficacy of matching systems by analyzing the specifics of each market and the requirements of market participants. Prior to implementing a change to market structure such as frequent batch auctions, we believe it is necessary to conduct a comprehensive and thorough analysis to best understand the consequences."
