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Securities and Exchange Board of India issues Algo trading guidelines

It has been observed that adoption of technology for the purpose of trading in financial instruments has been on a rise over the past few years. Stockbrokers as well as their clients are now making increased usage of trading algorithm (hereinafter referred to as “algo”).
1. Based on recommendations of Technical Advisory Committee (TAC) and Secondary Market Advisory Committee (SMAC), it has been decided to put in place the following broad guidelines for algorithmic trading in the securities market.

Definition

2. Algorithmic Trading – Any order that is generated using automated execution logic shall be known as algorithmic trading.

Guidelines to the stock exchanges and the stockbrokers

3. Stock exchanges shall ensure the following while permitting algorithmic trading:

(i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stockbrokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading.

(ii) In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker. Further, the stock exchange shall put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.

(iii) The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. The minimum order-level risk controls shall include the following:

a. Price check – The price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surgstem to detect sudden surge in prices.

b. Quantity Limit check – The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.

(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.

(v) Terminals of the stockbroker that are disabled upon exhaustion of collaterals shall be enabled manually by the stock exchange in accordance with its risk management procedures.

(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.

(vii) The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter alia incorporating turnover details of algorithmic trading, algorithmic trading as percentage of total trading, number of stock brokers/clients using algorithmic trading, action taken in respect of dysfunctional algos, status of grievances, if any, received and processed, etc.

(viii) The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of at least one micro-second and accuracy of at least +/- one milli-second.

4. Stock exchange shall ensure that the stockbroker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange. Stock exchange shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned below are in place and that the stockbroker’s system facilitate orderly trading and integrity of the securities market. Further, the stock exchange shall suitably schedule such conformance tests and thereafter, convey the outcome of the test to the stockbroker.

For stockbrokers already providing algo trading, the stock exchange shall ensure that the risk controls specified in this circular are implemented by the stockbroker.

Additionally, the annual system audit report for a stockbroker, as submitted to the stock exchange, shall include a specific report ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange shall subject the stockbroker systems to more frequent system audits, if required.

5. The stockbroker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the following minimum levels of risk controls at its end –

(i) Price check – Algo orders shall not be released in breach of the price bands defined by the exchange for the security.

(ii) Quantity check – Algo orders shall not be released in breach of the quantity limit as defined by the exchange for the security.

(iii) Order Value check – Algo orders shall not be released in breach of the ‘value per order’ as defined by the stock exchanges.

(iv) Cumulative Open Order Value check – The individual client level cumulative open order value check, may be prescribed by the broker for the clients. Cumulative Open Order Value for a client is the total value of its unexecuted orders released from the stockbroker system.

(v) Automated Execution check – An algo shall account for all executed, unexecuted and unconfirmed orders, placed by it before releasing further order(s). Further, the algo system shall have pre-defined parameters for an automatic stoppage in the event of algo execution leading to a loop or a runaway situation.

(vi) All algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail.

6. The other risk management checks already put in place by the exchange shall continue and the exchange may re-evaluate such checks if deemed necessary in view of algo trading.

7. The stockbroker, desirous of placing orders generated using algos, shall submit to the respective stock exchange an undertaking that –

(i) The stockbroker has proper procedures, systems and technical capability to carry out trading through the use of algorithms.

(ii) The stockbroker has procedures and arrangements to safeguard algorithms from misuse or unauthorized access.

(iii) The stockbroker has real time monitoring systems to identify algorithms that may not behave as expected. Stockbroker shall keep stock exchange informed of such incidents immediately.

(iv) The stockbroker shall maintain logs of all trading activities to facilitate audit trail. The stock broker shall maintain record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading.

(v) The stockbroker shall inform the stock exchange on any modification or change to the approved algos or systems used for algos.

8. The stock exchange, if required, shall seek conformance of such modified algo or systems to the requirements specified in the circular.

9. Stock exchanges are directed to:

(i) take necessary steps and put in place necessary systems for implementation of the above within a period of one month from the date of this circular.

(ii) make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

(iii) bring the provisions of this circular to the notice of the stockbrokers of the stock exchange and also to disseminate the same on the website.

(iv) For stockbrokers that are currently executing orders through algos, a period of three months is provided to the stock exchanges within which the approval process shall be completed and minimum risk controls shall be established, if not already done.

(v) communicate to SEBI, the status of implementation of the provisions of this circular in the Monthly Development Report.

10. This circular is being issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Filed under: India, Risk Management, , , , , , ,

2010 Top 10 Developments in Asia’s Electronic Trading Industry;Asia E-Trading

2010 was the year that Asia’s electronic trading industry focused on competition and services in what have traditionally been anti-competitive market places. We recorded over 1000 separate news items this year in Asia alone. We recognize that some of the developments that made our list will not be relevant to everyone but as a neutral third party observer we have come up with a list that we feel are the Top 10 Developments in Asia’s Electronic Trading Industry in 2010.

Original Article: Asia E-Trading 2010 Top Developments

10) The US CFTC now allows Malaysian futures brokers to deal directly with US customer. Perhaps individually not a Top 10 item as other brokers in Asia have been given the nod by the US regulator too. But when taken together with the recent Bursa Malaysia exchange technology upgrades in both the equity and futures segments, migration to the CME Globex platform and the record prices in the Crude Palm Oil contract Malaysia is now poised to take its place as a south-east Asian trading center. It will become a key anchor in the ASEAN link planned in the coming years.

9) China’s Index future launched April 16 after many years of delay was an important development not only for electronic trading but also for China’s budding algorithmic and hedge fund industry. The index has quickly become one of the largest index futures now traded in Asia. Though the back month doesn’t trade as much as it should it will only be a matter of time before that open interest picks up too. It shouldn’t be long before we see index options and an interest rate future for China as well.

8 ) Singapore Mercantile Exchange launched in late August this year. Asia is demanding more and more commodities as wealth and consumption grow around the zone. Generally, in Asia, commodity exchanges tend to offer just one product but the Singapore Merc is offering a basket of commodities to trade both physical and cash contracts. Trading is available in WTI crude, currency, gold and black pepper to name a few. Interestingly, though, is that the SMX is owned entirely by Financial Technologies Group (FTIL) an India based company that will see its exchange compete head on with SICOM, the SGXs commodities arm. Expect to hear more from the SMX this year.

7) The Japan Securities Clearing Corporation (JSCC) began clearing trades for Proprietary Trading Systems (PTS) in August substantially reducing the costs in the post trade for alternatives in Japan. While the playing field still isn’t level with the Primary exchanges, this development at the JSCC was a boost for Japanese PTSs. SBI Japannext, a consortium PTS, has regularly traded 1 percent of daily volume on its venue as a result of this change. We expect fragmentation to accelerate in 2011 in Japan which is already around 3 to 5%.

6) The launch of Chi-east. The joint venture between the Singapore Exchange and Chi-X called Chi-east made it to our list of top 10 developments in Asia electronic trading industry in 2010. The venture is a big step for Singapore in terms of spurring exchange competition and becoming a regional one-stop-shop for trading in Asia. Chi-East is a broker to broker alternative that will offer off-shore crossing using different clearing facilities around Asia.

5) China is now the largest agricultural commodity market in the world with the Dalian Commodity Exchange seeing record volumes in Corn and the Soybean complex. Coupled with the Shanghai Futures Exchange and its metal products the opportunities and future for the electronic trading industry vertical in China and the rest of the world are huge.

4) Exchange competition in Australia. On March 31 the Australian government announced its support for Exchange competition in Australia. While we are still waiting the promise of competition is compelling. The Australian Securities Exchange (ASX) has long held a monopoly over the industry with poor service and high trading fees (explicit and implicit). The ASX passed its supervisory duties to the Australian Securities and Investments Commission (ASIC) August 1 and with the Market Integrity Rules being finalized it shouldn’t be long before trading in Australia is much cheaper and better served. The ASX SGX merger could put a spanner in the works, however.

3) Smart Order Routing in India – SEBI finally permitted Smart Order Routing in India in August of this year much to the National Stock Exchanges chagrin. The Bombay Stock Exchange promptly offered this service to its customers in a bid to take market share from its larger rival. India has the tightest spreads in Asia of around 6bps and with SORs on offer we can expect spreads to tighten even further and volumes to shoot up. This long overdue regulation puts India on the road to offering best execution far ahead of its BRIC peer China. Deutesche equities was the first FII to receive approval for using SORs to both the NSE and BSE.

2) SGX / ASX Merger – We have seen it in the US and Europe and it has finally come to Asia, exchange consolidation. While the news of this reverberated around the world like a tsunami the reality, in AsiaEtrading’s view, is that this is a merger of survival. Both exchanges are very small and in aggregate are still quite small but would command the largest futures market in Asia (not including China’s commodities of course). The announcement is further evidence that Asia is moving to a more competitive industry and should be a wake-up call to the rest of the region. Our webinar on the topic had the panelists agreeing that the merger won’t happen. We’ll wait and see if this merger does indeed take place.

1) We ranked the Tokyo Stock Exchange Arrowhead upgrade as the most important development in Asia’s Electronic Trading industry in 2010. This was a significant and crucial development for one of the top exchanges in the world. Previously, order round trips were around 4 seconds and orders per second were on par with a Starbucks barista. The improved matching engine performance has tightened spreads, increased trading volumes and reduced order sizes. This in turn has attracted more sophisticated traders, reduced implicit trading costs and has generally benefited the Japanese trading industry significantly. Not only that, having come out of 2009 and the aftermath of the GFC, the successful upgrade was the turning point for what was a very activity business in 2010. To us it was the catalyst for the entire industry in Asia.

Source: http://www.asiaetrading.com, 02.01.2011

Filed under: Australia, China, Exchanges, Hong Kong, India, Japan, Malaysia, News, Singapore, Trading Technology, , , , , , , , , , , , , , , , ,

Celent: More positive reviews for India shares

Celent is the latest to sing the praises of India’s stock market.

The Indian equity markets are showing signs of recovery, according to Celent, a Boston-based financial research and consulting firm. Although India’s equity market capitalisation is still some way off the 2007 high of $3.3 trillion, it is expected to exceed 2008 levels in 2009 at $1.9 trillion, the firm says in its latest report on India shares.

Celent is the latest to sing praises for India’s stock market. Earlier this month, Credit Suisse unveiled a new target of 17,000 for India’s Bombay Stock Exchange benchmark index (Sensex). In June, BNP Paribas recommended its clients to reduce their exposure to China, which it has lowered to neutral from overweight, and increase their allocations to India, where the bank remains overweight. BNP Paribas’ own target for the Sensex is 16,500. The Sensex closed at 15,160.24 on Friday.

The key findings of the Celent report include:

India is one of the main emerging equity markets. The country’s leading stock exchange, National Stock Exchange (NSE) is ranked third in terms of the number of equity trades of individual exchanges. The Bombay Stock Exchange (BSE) is also one of the leading exchanges worldwide, and the Indian market continues to hold further promise, as the economy is expected to grow 5-6% even in the current economic downturn.

The NSE is expected to overtake the Bombay Stock Exchange (BSE) in market capitalisation in 2009. Already far ahead in turnover, the NSE is expected to further its lead. It has already cornered the exchange-based debt markets and the equity derivatives business and become the exchange of choice in India.

The NSE is preferred by foreign institutional investors (FIIs), while retail investors, domestic brokers, and sub-brokers prefer the BSE. NSE turnover is two times that of the BSE because FIIs hold on to shares for a shorter period of time than their local counterparts.

India’s debt market is underdeveloped. In spite of growth, the Indian corporate debt market is far behind developed and emerging economies worldwide. At an expected turnover value of $70 billion in 2009, it is equal to less than 10% of the government debt market.

In the equity derivatives market, volatility has meant that the investors prefer to trade more in index derivatives because they are far more liquid than stock futures and options. Index futures and options now comprise 64% of the trading done in futures and options. Just like equities, the equity derivatives market has also recovered, and the turnover in the fiscal year 2010 is expected to be around $3 trillion, close to the figure in FY 2008. The growth in turnover and volume has made NSE one of the top 10 derivatives exchanges in the world. Having one of the highest growth rates in 2008 (56%), it is expected to do even better in the future. Interestingly, in spite of being more complex a product than cash equity, the equity derivatives market is quite popular with retail investors, and they had more than 50% of the market share consistently throughout the period of June 2008 to May 2009. This bodes well for the breadth of participation in the market.

The equity derivatives market is dominated by the NSE, due to the superior use of technology and better strategy. Also, the NSE has a high growth rate, and it is expected to break into the global top five by volume in the near future. In 2008, it had a trade volume of 590 million contracts and grew by 55.4% over the previous year. This made it the eighth largest derivatives exchange in the world.

Stock futures and options are not very liquid. The stock futures developed as the number of stocks traded has gone up from around 30 to 40 stocks to between 150 and 200. However, stock options are illiquid, except in the case of leading companies, meaning that a lot of transaction volume is driven by a few signatures. This situation could be worrisome in the long run, and there is certainly room for improvement.

Index futures and options dominate the NSE’s equity derivatives portfolio. Reasons for this include: recent volatility in the global markets, the participation of retail investors (comprising 53% of the turnover in the NSE in May 2009) in the derivatives market, and the fact that it is easier for investors to use index futures and options.

Currency futures have started promisingly. In the period between October 2008 and June 2009, the total volume traded on the NSE and MCX-SX was 132 million contracts, which compares favourably with 577 million exchange-traded currency futures globally in 2008. The combined monthly volume was above 29 million contracts for the two Indian exchanges.

Interest rate futures are expected to be reintroduced before the end of 2009. The Indian capital markets have been undergoing incremental reform, and once currency futures have established themselves, the Reserve Bank of India, the central bank, the Securities and Exchange Board of India (Sebi), and the capital market regulator plan to establish new regulations and reintroduce interest rate futures.

For the interest rate futures market to succeed, banks should be allowed to trade. Futures failed miserably in 2003 because the banks were only allowed to hedge. As the main participants in these markets, banks should be allowed to trade and build up the demand-side of the market.

Volatility is high, and a product such as NSE’s volatility index would be useful. NSE has come out with a volatility index, which is a market-wide index. At present, it is not available for trading. However, it is important that NSE soon introduce trading in an index because this will be very useful for market modelling and will help investors cope with the uncertain capital markets better.

Foreign institutional investment has begun to reverse its decline in recent months. FII drives the Indian equity markets. There is a high correlation of0.38 between the between the performance of the Sensex and FII over the period of January 2004 and May 2009, and it had been affected by the recent crisis. However, April and May 2009 have been the first months with positive net monthly investment in equity in more than a year. There are signs that these investors are rediscovering their faith in Indian equity markets. The share of Asian FIIs has risen, comprising 25% of all the registered FIIs in India, closely following the US, which has 29%.

The role of domestic institutional investors (DIIs) and the retail investors is becoming more prominent in the Indian markets.

Retail investment will grow as technology improves and reach increases. While it may be some time before the retail investors become the main driver of the markets, they are becoming stronger, and the advent of exchanges such as the NSE and recently, MCX-SX will improve the possibility of domestic savings being invested in capital markets.

Indian capital markets are advanced technologically but need to continuously improve to be competitive internationally. Strategic partnerships with the world’s leading exchanges and an understanding of the importance of technology to improve both price and speed, is crucial. The exchanges need to work continuously to ensure they remain attractive destinations for international capital.

Supervision and innovation in the capital markets can be improved. Sebi has done a great job in fostering the rapid development of Indian capital markets. However, market manipulations need to be dealt with severely, and Sebi needs to play a more active role. Due to the late development of the Indian market, the regulator has so far been prudent, but as the Indian markets get more globalised and mature, Sebi could introduce innovations such as alternative trading venues to add breadth to and modernise the Indian capital markets sooner than would have been possible a decade ago.

Market-making should be allowed to provide greater depth and liquidity to the markets. Presently, market-making is not permitted by Sebi, possibly because it might be very complicated to monitor. However, it is an internationally accepted practice that is essential for the development of the markets, and Sebi should introduce it sooner rather than later.

Source:AsianInvestor.net,10.08.2009  Rita Raagas De Ramos

Filed under: Asia, Exchanges, India, News, , , , , , , , ,

Bombay Stock Exchange Delivers Low-Latency Market Data

Listed equities market data from the Bombay Stock Exchange (BSE) is now available via a low-latency direct feed from Thomson Reuters.

This move comes after the introduction of direct market access (DMA) trading that was recently announced by Securities Exchange Board of India (SEBI), according to a Thomson Reuters release.

Utilizing Reuters Data Feed Direct, clients can access BSE’s Low-Latency Feed (LLF), which provides real-time market data for all BSE-listed stocks, including prices, indices and volumes up to five levels.

BSE clients can connect from their own datacenter or using either Thomson Reuters’ hosted service in combination with the Reuters Market Data System (RMDS), or its application programming interfaces (APIs) directly. This allows BSE clients to build proprietary trading applications.

“The introduction of Low-Latency Feed by BSE is significant considering the fact that SEBI has permitted DMA to institutions across the globe through BSE member brokers. Moreover, the Indian economy is projected to grow at a rate of over 7 percent, even during the current crisis, and the interest in Indian stocks among global institutions has sustained reasonably and from this perspective, the Thomson Reuters solution comes at an opportune time,” says Mahesh Soneji, officiating managing director and CEO of BSE.

Source: Waters, 24.03.2009

Filed under: Data Management, Exchanges, India, Market Data, News, Trading Technology, , , , , , , , , , ,

DMA India: Excessive paperwork to hit smooth takeoff of DMA trading

MUMBAI: Too much of paperwork in terms of agreements with clients to avail the direct market access facility (DMA) may well slow down the pace of algorithm trading in India, say institutional investors. Algorithm, or program trading, is the backbone of DMA that will help players capitalise on the available arbitrage or hedging opportunities.

FIIs who were given the green light by SEBI in April this year to avail DMA facility, are finding the going slow due to the time taken to get their end clients to sign up on additional agreements.

Apart from this, FIIs also need additional approval from the exchange for the algorithm they will use for trading.

DMA, is an electronic facility offered by brokers to their clients, enabling them to place orders directly into an exchange-traded system. Currently, all investors – both institutional as well as retail – place their orders with brokers who, in turn, enter them into the exchange’s system. With DMA, clients can directly place their orders into the exchange system, using their broker’s infrastructure. Very popular abroad, DMA allows funds using algorithm or program trading to have direct control over their orders.

“India has some inconsistencies in that. Apart from submitting approvals for DMA, we also need approval on the algorithm that we will use for trading from NSE,” said an FII.

Algorithmic trading or program trading refers to orders that are automatically placed in the market by software programs, built on certain mathematical models. In its simplest form, algorithmic trading could be based on a program designed to detect an arbitrage opportunity between the cash and the futures market and placing orders real time to capitalise on any anomalies in pricing.

“For our external clients, it’s a matter of extra eight-10 pages of paperwork that need to be signed. This slows down the process, by when we would be good to go,” said the head-equity at the Indian arm of a foreign brokerage.

Several FIIs have been meeting with NSE and BSE seeking to operationalise their DMA facility. “The exchange is looking for assurance that the algorithm being used by the end client to brokers are stable and does not involve significant market impact,” said an institutional broker. On their part, FIIs are looking for increased ‘throughput’, meaning whether the exchange can handle increasing traffic and whether the execution of an order would be on time and efficient. On their part, given the new IT migration, NSE would be able to handle 3-4 times the peak trades they are handling at present, say officials.

While DMA is new to India, globally the system has succeeded in garnering a substantial share of the daily turnover. For FIIs like Credit Suisse, today roughly 40% of their business flowing into the Asia-Pacific region is going through DMA. “For markets like India, trading via DMA would mean increased volumes, liquidity, narrowing spreads. In fact, India is probably one of the easier market to trade in terms of narrow spreads (7 bps on an average and that is the narrowest in Asia),” said Brook Teeter, director of equities, (advance execution services) at Credit Suisse (Hong Kong).

“That makes electronic trading in India very good as it makes our algorithms work very efficiently. Now you will see increased volumes in India for overseas clients funds such as hedge funds and large institutions who will want to trade in India because of the anonymity it provides. We will see new entrants to the market. And those who were not trading in India will come in because of the anonymity,” he added.

Amongst those who currently have the DMA facility are Macquarie, Lehman, CLSA and Credit Suisse shortly.

Source: The Economic Times, 12.09.2008

Filed under: Asia, Exchanges, India, News, Trading Technology, , , , , , , ,

SEBI Issues Rules for DMA in India

The Securities and Exchange Board of India has released a circular explaining rules for Direct Market Access. DMA is a practice whereby clients can enter orders directly to exchange servers, decreasing latency and increasing trading efficiency.

DMA is in strong demand with traders who value speed in their trade orders. The regulations require DMA orders to be routed through brokers’ systems and to be identifiable as “DMA” orders. The servers routing the orders must be in India. The circular requires brokers to formulate and implement “know your customer” criteria for clients applying for DMA access and to perform regular system audits. SEBI will do a review of the new rules and their effectiveness in November.

Source: FIA 21.o5.2009

http://www.business-standard.com/common/storypage_c_online.php?leftnm=10&bKeyFlag=IN&autono=35253

Filed under: India, Trading Technology, , ,