SEBI to Issue Discussion Paper on HFT after It Accounts for 98% Equity Derivative Orders

Sucheta Dalal 07 June 2016

Investor Interest

A year after Moneylife published a whistleblower’s letter pointing to grave issues in the way high frequency trading (HFT) was conducted at India’s largest bourse, SEBI is still discussing plans to “put in place stringent norms for high-frequency trades along with higher penalties for misuse.”

HFT refers to the use of complex algorithms and high-powered electronic machines to execute thousands of transactions in a fraction of a second. This allows traders to make huge profits by scalping tiny gains from changing prices. It gives large players with servers located within the exchange (called co-location) an advantage over other investors, big and small. An investigation commissioned by SEBI’s technical advisory committee (TAC), following Moneylife’s exposé confirmed all the main charges of the whistleblower. Although SEBI has not released the details of the report, the minutes of the TAC’s meeting dated 15th March are available to many media and industry persons including Moneylife. This is the background to chairman UK Sinha’s statement to the media on 25th May that SEBI plans to issue a discussion paper on tightening the HFT rules and tackle the issue of fairness to all market participants and issue new rules in three or four months.

It is rather strange that SEBI will put out its first discussion paper six years after it allowed bourses to start HFT and when HFT already accounts for anywhere between 94% to 98% of trade orders in the cash and equity derivatives segment of the market. Instead, a time-wasting public discussion will be conducted when SEBI needs to act quickly on the findings of its own investigation and tighten the rules.

Mr Sinha justifies this lax attitude by emphasising that “SEBI is among the first regulators to have some kind of regulations in place on HFT.” This only indicates the kind of power that large financial institutions, brokerage firms and bourses exert on regulators around the world. It also shows that, eight years after a global financial crisis and five years after the “occupy Wall Street” protests, regulatory capture by those with money power remains undiminished. Bloomberg newswire has reported that two of India’s top broker associations have demanded action on the SEBI panel’s findings and to punish those involved in wrongdoing; but SEBI is in no hurry to even announce new regulations at least for three months.

Moneylife learns that the finance ministry as well as some MPs (members of parliament) have keenly followed SEBI’s action in connection with the findings of its TAC and asked for its report. SEBI chairman is also reported to have told the media that some government agencies were also looking at the issue from a cyber-security perspective.

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