Sebi should devise policies to ensure that the market is non-discriminatory and equitable

In the way that an open, accessible and neutral internet regime is the most preferred option for net users, the Securities and Exchange Board of India (Sebi) will have to devise policies to ensure that the market is a non-discriminatory, fair and equitable forum for businesses and investors alike.

Sebi will have to put in place rules and regulations that distinctly favour small investors while undertaking technology driven and software linked algorithm trading in equities and derivatives. There is no reason why algorithm trading should remain the exclusive domain of only the institutional investors who have an edge over others in the marketplace. The market watchdog will have to end the domineering presence of large traders, brokerages and institutional investors in accessing the high frequency trading (HFT) regime that provides them a distinct advantage over others.

Economic affairs secretary Subhash Chandra Garg has rightly pointed to pitfalls of algorithms trading that are prevalent globally. It needs to be abundantly clear that maximising profit by either institutions or large traders owing to their expertise and experience should not be a crime. But, using algorithms as an instrument to create non-competitive elements in the marketplace or cartels by groups of market participants is unacceptable and there should be a punitive deterrent for this. Killing a competitive environment to create arbitrage advantage for a few and disadvantage others should be prevented in the proposed Sebi framework for algorithms.

Framing rules to make the algorithms democratic and equitable for all — both institutions and individuals — should be the bedrock of new Sebi framework keeping in mind the technology backbone, platforms available in India. While in India, the algorithm-based trading accounts for a meager 43 per cent of volumes, while in advanced markets like US, algos touch 85 per cent of the daily turnover across segments, including cash and derivatives.

Currently, neither Sebi nor the bourses prevent individuals from taking advantage of the applications programming interface (API) provided by their brokerages to take recourse to algo trades. Sebi  and the finance ministry have been campaigning against instances of preferential access provided by some platforms on both NSE and BSE. A few months back, Sebi had launched an investigation into questionable algorithm trading on the NSE. The stock market regulator should now move ahead with a framework on algorithms trading only if it has the wherewithal to stop or regulate malpractices that could kill competition through cartels.

Given that India is on way to established a digital less-cash economy, SEBI will have to exercise abundant caution in extending the algo regime to retail investors who may become easy victims of manipulation, speculation and get sucked into technology driven and HFT whirlpool.

On July 10 this year NSE had to shut down for three hours owing to technology glitches not allowing trade updates in cash, futures and options segments. Allegations flew thick and fast on what went terribly wrong that an entire day’s trading was lost. Governance issues and algorithms were the biggest suspects in NSE, and SEBI chief Ajay Tyagi sent notices to 14 brokers who were allegedly provided preferential access to undertake HFTs and algo trades. There were also arguments that the NSE should not lose all gains made in last few years.

The NSE board that suspected illegitimate gains made by its own officers had ordered yet another separate probe to nab the culprits and restore the confidence as well as credibility of the trading platform. BSE had faced similar issues in the past from which NSE seems to have not learnt its lessons. Even in advanced markets, algorithms were always a source of controversy, suspicion and seen as the play of big boys though some small investors did make hefty gains in the process. Nasdaq, NYSE, Intercontinental exchange, Chicago Merchantile Exchange, Tokyo Stock Exchange and several others faced massive algo-induced technology glitches. Hence caution is the buzzword when it comes to algos.