Regulatory Measures

So long as institutional investors & regulatory bodies have acknowledged the merits of algorithmic trading, its potential cascading effects have been a long-standing point of debate. 

The Securities and Exchange Board of India (SEBI) has kept the interests of retail investors in mind & ensured a frictionless & systematic transition to algorithmic trading since its introduction in 2008. Over the years, SEBI has proactively come up with a host of guidelines to strengthen the algorithmic trading framework in India:

Approvals

All traders & investors, right from individuals to hedge funds are authorized to perform algo trading.

If the algorithmic program involves human intervention, exchange approvals are not mandatory. However, if trading is automated or is carried out using robots, where manual intervention is not required, prior approvals from the respective exchanges are requisite. It is also imperative to note that the exchange can flag automated order execution through cutting-edge software.

Note- Clients can seek assistance from their brokers to get their algorithms speedily validated by the exchange. 

Order to Trade Ratio

OTR can be computed as the ratio of the total number of order submissions, modifications & cancellations for an order over the number of trades a client does on the exchange. 

Recall that Algo traders usually place a large number of orders to capitalize on opportunities that exist in a very short time frame. The OTR framework was introduced to disincentivize traders from placing large (fake) trades without the intention of executing them with a motive to manipulate the order book. 

Currently, an OTR greater than 50 attracts a penalty from the exchange. For an OTR of more than 500, in addition to the penalty, the client would not be allowed to trade for the first 15 minutes of the next trading day.

Penalty shall also be imposed on algo orders placed beyond 0.75% of the Last Traded Price (LTP) in either direction.

Tick-by-Tick Data Feed

A tick-by-tick (TBT) data feed provides details pertaining to orders (addition + modification + cancellation) & trades on a real-time basis. A TBT data feed facilitates a comprehensive view of the order book. 

Earlier, this facility was only made available to desirable market participants upon paying requisite fees. However, in 2018, the SEBI directed stock exchanges to provide TBT data to all the trading members free of charge.

The objective behind such a move was to adhere to the principle of market fairness by providing a level playing field to all the market participants irrespective of their technological/financial resources

Shared co-location services

We have already highlighted the magnanimous costs associated with availing a co-location facility. 

The SEBI introduced shared co-location services in 2018 thereby drastically reducing costs for smaller trading members wishing to operate from the co-location facility 

Mock Trading

Exchanges conduct mock trading sessions on any one Saturday in a given month. During this session, the brokers put to test their trading infrastructure, recovery & response mechanisms, new products/services, contingency drills, etc. 

The SEBI encourages brokers & members with approved algorithms to participate in these mock trading sessions so that traders can verify their trading applications for various functionalities inclusive of exceptional market conditions. 

In addition, the SEBI instructed stock exchanges to make available a simulated market environment for testing of trading software over & above the existing mock trading sessions.