SEBI to review high frequency trading risk management system

“Though SEBI is yet to come up with a risk management system for high frequency trading, we want all the players to have their own risk management systems in place,” SEBI chairman UK Sinha told reporters

Mumbai: Capital markets regulator Securities and Exchange Board of India (SEBI) today ruled out banning high frequency trading or algo trading products even as it expressed concern over their faster growth and technical glitches they entail, reports PTI.

“We will consult all the stakeholders before taking a decision. Though SEBI is yet to come up with a risk management system for these products, we want all the players to have their own risk management systems in place,” SEBI chairman UK Sinha told reporters on the sidelines of a CII meet on capital markets here.

Observing that SEBI is not looking at banning these products, Mr Sinha said, “but, we are worried.”

Algorithmic trading or high frequency trading system uses highly advanced mathematical models to make transaction decisions. This highly quantitative trading model employs computerised algorithms to analyse incoming market data and implement proprietary trading strategies wherein large quantities of shares are purchased by dividing them into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.

Use of these products has been gone up significantly in domestic markets in the last three years.

Joining Mr Sinha, BSE managing director and chief executive Madhu Kannan said when he joined the premier exchange two-and-a-half-years ago, “only 5% trades on the BSE used to take place using algo products but this has now gone up to 25%”.

Following a technical glitch on the Muhurat trading on BSE, which led to cancellation of the entire derivatives trade on the exchange on Diwali day, SEBI had said it would do a thorough review of the risk management system in algorithmic trading to stop repetition of such incidents.

Addressing the Association of National Exchange Members of India last week, Mr Sinha had warned that the regulator would not allow anybody to mess with the system in the backdrop of some members being allegedly involved in manipulation.

“We have an effective risk management system, but we would not compromise. That is why we are ready to review,” he had added.

Mr Sinha had also hinted at that the proposed review would consider changes in the margin system and the capacity to take the trades. Accordingly, the secondary market advisory committee, at 11th its November meet, had discussed the matter.

On the introduction of new products, Mr Sinha said, “We are going to be very cautious about allowing new products, especially if we perceive they are going to be risky.”

He also added that the markets watchdog fully supports the products in the infra space like infra debt funds.

“Without infra growth we cannot have high growth,” Mr Sinha said.

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