23/12/2015
Sebi wants bourses to provide a level playing field for HFT traders
MUMBAI: Capital market regulator Sebi wants stock exchanges in India to provide a level playing field for traders who use high frequency trading (HFT) through co-location and those without the facility.
The debate over the use of HFT has resurfaced after the recent release of Michael Lewis' book Flash Boys, which is critical of the system. The discussion within Sebi is that stock exchanges should implement its guidelines issued last year, which states there should be a two-queue system for orders coming from co-location and other mode.
Such an architecture will provide orders generated from a space not co-located a fair chance of ex*****on and address concerns related to being crowded-out by orders placed from co-location, a Sebi official said.
Co-location is like proximity hosting, where the exchange hosts the subscriber's server at its data centre near the master trading engine and helps in faster movement of data and ex*****on of trades. Not all traders can use co-location as setting up the infrastructure involves huge costs. Both National Stock Exchange (NSE) and the BSE do not follow any separate queue system currently.
The two-queue system would ensure stockbrokers who are not co-located have a fair and equitable access to the stock exchange's trading systems, said Sebi. The regulator had said distribution ratio of orders from terminals/servers that are not co-located to the orders from co-located servers may be kept at 1:1 and, in future, it may be reviewed based on the feedback from market participants.
"Conceptually, I am not against such a system," said Rajesh Baheti, managing director of Mumbai-based Crosseas Capital, one of the largest domestic arbitrageurs using HFT. "It should be seen if such technology is possible and the results should be measurable."
Lewis argues in his book that the $23-trillion US stock market is rigged in favour of HFT traders, who prey on slower investors by getting early access to non-public information. The Federal Bureau of Investigation in the US is already probing potential criminal activity associated with HFT.
On April 4, US attorney general Eric Holder said the justice department is investigating whether HFT violates insider-trading laws. Many other brokers believe the debate over HFT versus non-HFT is a question of market integrity. "Many private investors do not participate as their orders are executed at a slower speed during events or major news. They believe that markets are rigged against them," said a Delhi-based broker.
The NSE did not comment on the issue. The BSE said it will continue to implement all Sebi policies in earnest and currently it does not give any priority to HFT traders in terms of information or matching of orders. But then sources close to NSE say the exchange, too, does not allow order matching on priority basis to HFT traders and they get matched as and when they come.
As per the latest data on NSE, HFT constitutes 17.15 per cent of the overall trading volumes. HF proponents say Sebi's suggestion cannot be implemented. "People will stop co-locating," said Hirander Misra, CEO, Global Markets Exchange Group.
"Co-location is mainly for time priority. It gives liquidity to markets with high number of passive orders. If you say orders that come first may not go first, then people will stop using it. Separate order queues will close down co-location."
