HFT on the radar of Indian and Chinese regulators

High Frequency Trading (HFT) received its share of attention in the US last year with the publication of Michael Lewis' Flash Boys. Recently it has received attention from somewhat unexpected quarters - regulators from India and China. India's securities market is regulated by the Securities and Exchange Board of India (SEBI), while Reserve Bank of India (RBI) mainly deals with the country's banks and monetary policy. However, in a recent Financial Stability report, it expressed worries about trends in algorithmic trading (a cousin of HFT) in the country. Algo trading was introduced in India around 2008 with allowing direct Market Access (DMA) in the local market; colocation was allowed subsequently in 2010 to promote its adoption. Even though it didn’t take off immediately due to overall macroeconomic condition persisting around 2008, it now represents a sizable share of around 40 per cent of cash segment trades conducted at the two major exchanges, up from around 15 per cent in 2011. More worrying for the RBI is its share in cancelled orders – of all cancelled orders, around 90 per cent comes from algo orders, and this has become a cause for concern for the RBI. To be sure, India, like many other emerging markets, has conservative regulations in all aspects of its financial services markets and promotes innovation in the markets gradually trying to contain potential risks to the maximum extent possible (for example, new algorithms need to be tested and approved by exchanges). A while ago SEBI indicated that it would come out with guidelines to curb very high order-to-trade ratio. SEBI is now considering measures to control some aspects of algo trading. One idea floating around is a lock-in proposal that prevents traders from cancelling an algo order for a given period of time. Another idea is to install a two-queue system, which allows trades by brokers with co-location and another without. China’s securities regulator is also scrutinizing high-frequency traders since its recent stock market troubles raised concerns about its financial system, though China is still at a nascent stage in its adoption of advanced trading tools and technology. Like India’s case, order cancellation seems to be their cause of concern as well. These two may be isolated incidents, but serve to underline two important themes; first is the obvious growing scrutiny on algo and high frequency trading from regulators world-wide. Equally important is the trend that while emerging markets look to emulate and adopt innovations taking place in the developed world, they are also keen to do it ‘their way’; and this is most apparent in their practices of risk management and market safeguard.