Algorithm Trading Current Affairs - 2019
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The Securities Exchange Board of India (SEBI) has relaxed algorithm trading norms at commodity derivatives exchanges. The market regulator has raised limit of trading using algorithm trading process up to 100 orders per second by user from the existing limit of 20 orders per second.
The decision was taken after receiving representations from exchanges along with views of SEBI’s subcommittee- Commodity Derivatives Advisory Committee. SEBI has asked exchanges to ensure that limit provided by it is subject to its ability to handle load. Besides, it also has decided to do away with requirement of empanelment of system auditors by the exchanges for system audit of algorithmic trading.
Algorithmic trading in financial markets refers to transaction orders generated by using advanced mathematical models that involves automated execution of trade. It uses mathematical models and software codes to make transaction decisions on exchanges and execute them at high speed.
This technology-driven trading enables traders to take advantage of any profit making opportunities arising in the market much before a human trader can even spot them. It was introduced in India in 2009. At present, on National Stock Exchange (NSE), algorithm trades accounts close to 16% of all trades. On the Bombay Stock Exchange (BSE), it was 8.56% in January 2017.
Difference between algo trading and high frequency trading (HFT)
Both are often used inter-changeably, but they are not really same. HFT refers to high-volume orders executed within split-seconds to make immediate gains from market opportunities. HFT trading are often backed by algo trading, which spot trading opportunity.
Market regulator Securities and Exchange Board of India (SEBI) has set up a committee on ‘fair market conduct’. It will be headed former law secretary T K Viswanathan.
The committee will suggest measures for improving surveillance of the markets and strengthen rules for algorithm trades, among other norms.
Its members include representatives from law firms, mutual funds, retail and institutional brokers, forensic auditing firms, foreign portfolio investors, stock exchanges, chambers of commerce, data analytics companies and the markets regulator.
The securities market environment is dynamic, so there is need for periodic review of regulations and surveillance mechanisms in order to effectively discharge the objectives of SEBI.
Terms and Reference of Committee
The committee will suggest measures for improvement in PFTUP (Prohibition of Fraudulent and Unfair Trade Practices) regulations, PIT (Prohibition of Insider Trading) norms and norms mainly related to ‘trading plans’ and handling of ‘unpublished price sensitive information’ during takeovers.
It will suggest short term and medium term measures for improved surveillance of the markets as well as issues of high frequency trades, harnessing of technology and analytics in surveillance. It will suggest evidentiary issues in anti-fraud enforcement. It will be also responsible for recommending steps to align insider trading regulations with Companies Act provisions.
About Securities and Exchange Board of India (SEBI)
SEBI is the statutory regulator for the securities market in India established in 1988. It was given statutory powers through the SEBI Act, 1992. Its mandate is to protect the interests of investors in securities, promote the development of securities market and to regulate the securities market.
SEBI is responsive to needs of three groups, which constitute the market, issuers of securities, investors and market intermediaries. It has three functions quasi-legislative (drafts regulations in its legislative capacity), quasi-judicial (passes rulings and orders in its judicial capacity) and quasi-executive (conducts investigation and enforcement action in its executive function).