High frequency trading or the use of software programmes to trade in the equity market is gaining popularity though global regulators, including the Securities and Exchange Board of India (Sebi), are struggling to find ways to regulate such trading in the capital market.
“Not only Sebi but a whole lot of global regulators today are struggling to find out the best way to handle it,” said Sebi chairman UK Sinha.
“Because there is so much space for reducing the latency by a few micro seconds that regulators all over the world are looking into taking some action, which would be of global standard. We are also participating in the discussions,” he said while speaking at the Thomson Reuters South Asia Risk Summit here.
According to the Sebi chief, the Indian capital market watchdog is also working separately on the issue and might also come out with some guidelines before IOSCO does.
IOSCO refers to the International Organisation of Securities Commissions, a global body of securities market regulators.
High frequency trading or HFT refers to using software programmes for executing trading strategies. Since there is no manual intervention, the trade execution happens in less than a second as and when the parameters are triggered. The share of HFT is rising in the equity market as many large institutional investors prefer such mode of trading.
According to market estimates, HFT accounts for nearly 40 per cent of the total turnover of the equity market. SEBI has been reviewing the HFT norms and have also put in place certain safeguards to prevent rogue programmes to hit the market.
On a different note, Mr Sinha also spoke about the commodity derivatives market that came under Sebi’s regulatory purview in September last year. The Sebi chairman said that the risk management systems in the commodity segment have to be enhanced further.
“The risk management in the commodities futures trading is not on par with the regulations in the equity market. We have taken a series of measures and a review is going on, which will get over in a few months,” said Mr Sinha.
Incidentally, the commodity market dynamics are quite different from those of equity as the prices are linked to the spot market and other external factors like production, monsoon and warehousing among others.
The Sebi chairman said that the price discovery mechanism in the spot market is an issue as there is lack of enough information on the actual production and stock. The regulator will be careful in allowing new commodities, he said.
“Sebi has been very careful in allowing trading in new commodities. We want to do that but we will be doing it very carefully. Unless we are assured that there’s enough liquidity likely in some commodities, we will not consider that,” he said.
