Sebi proposes new framework for algo trading, co-location

Algorithmic trading or 'algo' in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade, while co-location involves setting up servers on the exchange premises.

The Securities and Exchange Board of India (Sebi) has proposed to introduce resting time for order, random delays and random speed bumps, separate queues for co-location and non-co-location orders for strengthening the regulatory framework for algo trading and Co-location facility. The regulators across the world are looking to find an effective solution for this. Sebi has sought public comments on the proposal till August 31 and final guidelines would be put in place after taking into account views of all the stakeholders. 

The speed bump mechanism involves introduction of randomised order processing delay of few milliseconds to orders. The move is expected "to discourage latency sensitive strategies as such delays would affect HFT (High Frequency Trade) but would not deter non-algo order flow for which delay in milliseconds is insignificant," Sebi said in a discussion paper.

"The intent behind such mechanism is to nullify the latency advantage of co-located players to a large extent," it added. The regulator also plans to begin minimum resting time mechanism, wherein orders received by the stock exchange would not be allowed to be amended or cancelled before a specified amount of time -- 500 milliseconds is elapsed. Besides, it plans to eliminate 'fleeting orders' or orders that appear and then disappear within a short period of time.

The regulator has proposed introduce separate queues and order-validation mechanism for co-lo orders and non-colo orders. "Orders from queues will be taken up in the order-book in round-robin fashion... the co-located participants would still be among the first to receive the market data feeds due to their proximity to the trading platforms of the exchange and this coupled with the capability to make trading decisions in fraction of seconds would still provide the co-located participants the ability to quickly react to such market data," Sebi noted.

The regulator is examining various options to allay fear and concern of unfair and inequitable access to the trading systems of the exchanges. Accordingly, it has decided to consult market participants and seek their views on the efficacy and need to introduce the several mechanisms in markets.

It also proposed to introduce randomisation of orders, maximum order message-to-trade ratio requirement and review of tick-by-tick data feed. Under the randomisation of orders, time-priority of the new/modified orders that would be received during predefined time period (say 1-2 seconds) randomised and the revised queue with a new time priority is then forwarded to the order 

matching engine.