Bloomberg News

India Boosts Checks on Automated Trade to Curb Manipulation (1)

May 22, 2013

India’s market regulator revised guidelines for computer-based trading, providing for temporary suspension of brokers and higher fines to curb manipulation.

Brokers offering algorithmic trading facilities must get their systems audited every six months, the Securities and Exchange Board of India said yesterday. The regulator also directed exchanges to double the penalty on trading firms that place a large number of orders that don’t result into actual transactions. The rules come into effect May 27.

Regulators around the world are probing market structures and electronic trading after a series of mishaps. Trading in India’s CNX Nifty was halted for 15 minutes on Oct. 5 after the 50-stock measure sank as much as 16 percent. While the plunge wasn’t due to a malfunctioning trading program, the new rules are aimed at preventing a repeat of routs, said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt.

“The measures have certainly come in the aftermath of the markets crash we saw late last year,” he said by phone from Mumbai. “The increase in charges suggests that the regulator wants to put a check on speculative trading that’s happening in the markets.”

The Nifty slump came about two months after market maker Knight Capital Group Inc. (KCG:US) bombarded U.S. bourses with mistaken orders in the first few minutes of trade, while high-frequency orders worsened the so-called flash crash of May 2010, which briefly wiped $862 billion from American equities. A surge in trades of about 12 Australian stocks two weeks after the Nifty incident spurred inquiries from that nation’s market regulator.

Complex Markets

Global stock markets have become predominantly electronic over the last 15 years as technology costs fell, rules changed and computers that match orders replaced human traders. Algorithms, which buy or sell larger orders in smaller pieces across venues, automated a process previously handled by individuals as the complexity and speed of markets increased.

India is the most recent jurisdiction after Hong Kong, Australia and Europe to update rules for electronic trading. Hong Kong’s rules, which come into effect Jan. 1, make firms responsible for all settlement and financial obligations for orders sent through their systems.

Indian exchanges, following the regulator’s directive in March last year, began levying charges to dissuade algorithmic trading firms from placing a large number of orders that don’t convert into actual transactions. The BSE Ltd. charges up to 0.05 rupee per order when a brokerage’s order-to-trade ratio falls between 250 and 500, according to the bourse’s website. Sebi yesterday directed exchanges to double that charge.

Punching Error

“More system auditing is definitely good but not enough to prevent freak trades from happening,” Supreeth S.M., chief executive officer at Quant First Asset Advisors India Ltd., which manages options with a notional value of about $100 million, said by e-mail from Bangalore. “There should be more tightening of the way you can put orders through algo” to prevent punching errors, he said.

The Nifty incident was caused by as many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. (EMKAY) in Mumbai, the National Stock Exchange Ltd. said in a statement on Oct. 5. The brokerage said Oct. 8 that one of its dealers “committed a bona fide error.”

The S&P BSE Sensex, India’s benchmark stock index, has risen 3.5 percent this year, the most among benchmark measures in the BRIC group of the largest emerging nations, as foreign funds extended equity purchases amid easing by central banks from Europe to Australia. The 30-stock gauge fell 0.1 percent to 20,097.81 at 1:45 p.m. in Mumbai.

To contact the reporters on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net; Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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