FIA sent a comment letter to the Securities and Exchange Board of India (SEBI) in response to the regulator's discussion paper on Strengthening of the Regulatory Framework for Algorithmic Trading & Co-location.
SEBI, the country's primary regulator of financial and commodity markets, is considering a wide range of measures to restrict high-frequency trading. SEBI 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 co-location centers from other orders and requiring exchanges to process them separately.
FIA's response was developed with assistance from the FIA Principal Traders Group and it encouraged SEBI to consider the detailed risk control recommendations put forward by the association in several recent white papers. FIA stressed the importance of establishing risk controls designed specifically for electronic trading and 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.
FIA's comments touched on:
- Minimum Resting Time for Orders
- Frequent Batch Auctions
- Random Speed Bumps or Delays in Order Processing/Matching
- Randomisation of Orders Received during a Period
- Maximum Order Message-to-Trade Ratio Requirement
- Separate Queues for Co-Located Orders and Non-Co-Located Orders (2 queues)
- Review of Tick-by-Tick Data Feed
"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."