The SEBI headquarters in Mumbai, India (Photographer: Adeel Halim/Bloomberg)

SEBI Strengthens Algo Trading Rules; Co-Location Facilities

In order to facilitate small- and medium-sized trading members, SEBI today asked stock exchanges to introduce ‘managed co-location services’, wherein space will be provided to vendors along with technical knowhow and other expertise.

Besides, the regulator has taken a number of measures to strengthen algo trading framework, including providing some services for free, the Securities and Exchange Board of India said in a circular.

The decision has been taken after receiving public comments and in consultation with SEBI’s two panels – Technical Advisory Committee and Secondary Market Advisory Committee.

The regulator noted that small- and medium-sized trading members, find it difficult to avail co-location facility, due to various reasons, including high cost, lack of expertise in maintenance and troubleshooting.

Under the ‘managed co-location facility, space/rack will be allotted to eligible vendors by the stock exchange along with provision for receiving market data for further dissemination of the same to their client members and the facility to place orders (algorithmic or non-algorithmic) by the client members from such facility.

The vendors will provide the technical knowhow, hardware, software and other associated expertise as services to trading members and will be responsible for upkeep and maintenance of all infrastructure in the racks provided to them.

Stock exchanges will supervise and monitor such facilities on a continuous basis. Besides, exchanges will be responsible and accountable for actions of vendors providing managed co-location services and ensuring integrity, security and privacy of data, being handled at the facility.

Further, in order to have fair competition, exchanges have been asked to ensure that multiple vendors are permitted for providing such services at their co-location facility.

Co-location is a facility provided by exchanges to trading members and data vendors, whereby their trading or data systems are allowed to be located within or at close proximity to the premises of the bourses.

This facility enables the co-located entities to access the trade/order related data before other non-co-located entities. It also enables co-located members to minimise the time for sending orders to the trading system of the exchange.

Algo trading includes automated rule-based trading where decision-making is delegated to a computer model, while High Frequency Trading (HFT) is a type of algo which is latency sensitive and is characterised by high daily portfolio turnover and high order-to-trade ratio (OTR).

In order to bring in greater transparency, exchanges will have to additionally publish minimum, maximum and mean latencies and latencies at 50th and 99th percentile.

Latency is measured by the exchange as the time taken to complete the round trip from the Core Router – the place where both co-location orders and non-colocation orders meet – to the matching engine and back.

SEBI has asked exchanges to provide tick-by-tick data feeds to all the members, free of cost. This is subject to trading members, creating the necessary infrastructure for receiving and processing it. Under the tick-by-tick data feed, exchanges provide a detailed view of the entire order-book, which includes details relating to addition, modification and cancellation of orders and trades on a real-time basis.

The exchanges have been asked to allot a unique identifier for each algo. Presently, one specific code is attached to all algo orders to distinguish them from non-algo trades.

To further streamline and strengthen the process of testing of software and algorithms, exchanges will have to provide a simulated market environment for testing of software, including algos.

Such a facility may be made available over and beyond the current framework of mock trading prescribed by the regulator.

The exchanges will have to ensure that the tagging of each order and each algorithm with its unique identifier is completed by September, while other provisions of the circular will be complied by June.

Besides, the algo orders placed within 0.75 percent on either side of the last traded price will be exempted from the framework for imposing penalty for high OTR.

Further, the OTR framework wil be extended to orders placed in the equity cash segment and orders placed under liquidity enhancement scheme.