Algo trading and delisting of illiquid stocks

According to this article SEBI is planning to delist several illiquid stocks(4200) from the Indian stock market. India has a large number of stocks listed in the stock exchanges but almost no trading ever happens in quite a lot of them. And some of these stock are used for illegal transactions. I think this is welcome move from SEBI.  the article has also mentioned that SEBI is planning to bring new regulation in Algo-trading which is also a need of the hour in India.

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Entry Fee of Funds in UK

This article in financial times talks about fund are using entry load fee to exploit naive investors and also how UK regulator is looking into the issue. As the article has noted India is ahead of Europe in this issue. Indian regulator SEBI has banned entry load of mutual funds in 2009. I have mentioned this fact in my blog earlier here.

An interesting difference I found in this article between India and UK is that Indian investors are charged less if they directly buy from the fund (direct option) while it is reverse in UK. This doesn’t make sense because if the investor directly approaches the asset management company(AMC),  AMC doesn’t have to pay any amount to the intermediary and they should pass on this benefits to the investor. But it seems European AMCs prefer having investors coming through regular channels.

I think I am missing something in the whole issue. The article does note that the investors directly approaching the AMC will increase costs over the regular channels like exchange but I am still not convinced that the costs increase to that extent. because of the cost structure the investors who are approaching the AMC directly can be considered as naive investors. This is exactly opposite in India. Investors directly investing with the fund management company are considered intelligent!! In fact SEBI has been bringing several new regulations into effect to ensure that investors directly approach AMC rather than regular channels.

NSE controversy – Part 2

This article on mint talks about the response of NSE on allegations about which I have written in this blog here. NSE in its response has completely refuted all allegations against it that it favored few brokers over others.

““NSE’s response is rather comprehensive; they have refuted allegations of collusion. They have highlighted that they did not violate any regulations that were prevalent during the relevant period. The exchange has also spoken about certain factual inaccuracies in report and sought fresh examination of the issue,” said the second person, he too declined to be named considering the sensitivity of the issue.

The allegations against NSE pertain to members who co-locate their servers on the premises of the exchange. Even at these co-located centres, some of the servers themselves might have differing hardware capabilities or workloads.

This issue first came to light when a whistleblower who went by the pseudonym Ken Fong wrote to the regulator alleging that NSE’s systems were being misused, and that some people consistently enjoyed advantages to the detriment of others. The minutes of Sebi’s technical advisory committee said that it had received three such letters from the whistleblower.

After examining the issue, a Sebi panel had recommended action for lapses on the part of NSE and exploitations made by brokerage OPG Securities under the guidance of the panel. The panel further advised Sebi that it may constitute a team comprising people with appropriate background to investigate the collusion aspect between NSE officials and OPG.

The report in question was prepared by a sub-committee constituted by TAC. This sub-committee had six Sebi officials and Om Damani, a professor of computer science and engineering at the Indian Institute of Technology, Bombay. In its report, the sub-committee said the bourse had not provided adequate details to the committee examining the issue.

NSE in the reply has stated that allegation that the bourse had violated norms by allowing non-ISPs such as Sampark (Infotainment) to lay dark fibre on its premises for various members is factually incorrect, said the second person cited above. ISPs refer to Internet service providers. According to NSE, Sampark was a sub-vendor of a registered ISP, the second person said.

Dark fibre refers to a dedicated communication line through which data travels faster than regular lines because of the absence of other traffic. As such, there is nothing illegal about using such faster connectivity infrastructure.

NSE, in its response, has also pointed out there were no clear regulations at the time of alleged violations. Between 2011-2014 the period, when certain brokers allegedly gained unfair advantage, there was an absence of regulations and tools that are currently being used to allow for fair access to market data and exchange platform, NSE has highlighted, said the second person.”

I think the words by people interviewed in the are rather carefully chosen. NSE may not have violated the regulations at that point in time but that does not necessarily mean they have acted in an immoral way. Regulations more often than not lag markets. Even in the present case India is still developing its regulations with respect to algo and high frequency trading. However lack of regulations does not mean that NSE is not responsible.

“The first responsibility of an exchange is fair access of the order book to all investors, if that is being violated then it puts question mark on the integrity of the exchange. The justification that there were no regulations during the relevant period is immaterial as the first principle that is fair access has been violated,” said Shriram Subramanian, founder and managing director, InGovernResearch Services Pvt. Ltd.

Sebi’s technical advisory committee had suggested that a framework should be established within Sebi and stock exchanges to detect any abuse of the system by algo traders.

According to a 17 May Mint report, Sebi has already started implementing the recommendations of the panel which advises it on algo trades. In consultation with Sebi’s technical advisory committee earlier this month, the regulator has decided to have more checks and surveillance at the level of exchanges. To ensure this, NSE and BSE Ltd could be asked to constitute a separate team to keep an eye on algo trades, Mint reported. These checks would be in addition to the existing surveillance systems of exchanges.

 

India’s new bankruptcy law

India has finally successfully passed the new bankruptcy law. This article on mint gives a good picture on some of the issues with respect to this law.

“The new code will replace existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms. It will amend laws including the Companies Act to become the overarching legislation to deal with corporate insolvency. It will also help creditors recover loans faster.

The move is also expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index, since all reforms undertaken by 31 May are incorporated in the next ranking.

On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve a case of bankruptcy in India, according to the World Bank. The code seeks to reduce this time to less than a year.

The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies. It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system. The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator of these utilities and professionals.

It also proposes to use the existing infrastructure of National Company Law tribunals and debt recovery tribunals to address corporate insolvency and individual insolvency, respectively.

Anjali Sharma and Susan Thomas of the Indira Gandhi Institute of Development Research wrote in a 10 May column in Mint that the code assumes the existence of institutional infrastructure like information utilities and insolvency professionals, information repositories like stock depositories; a new regulator, without the failings of existing regulators; and a high-quality adjudication infrastructure.

“Unless these four pillars are in place, the Code will fail,” they wrote, highlighting the huge pendencies faced in the debt recovery tribunals.

Responding to the debate in Rajya Sabha, minister of state for finance Jayant Sinha said the government will try to go through a stage-wise process to ensure smooth implementation, “notifying provisions as and when the necessary infrastructure is ready”.

Ashwin Bishnoi, a partner at law firm Khaitan and Co., said the insolvency code proposes a vast change and its implementation will take time.

“The code has set the framework for bringing in changes in the debt recovery tribunals,” he said adding that India has many professionals who can easily step into the role of insolvency professionals.

The bankruptcy code has provisions to address cross-border insolvency through bilateral agreements with other countries. It also proposes shorter, aggressive time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals, National Company Law Tribunals and courts.

Bankruptcy applications will now have to be filed within three months; earlier, it was six months.

To protect workers’ interests, the code has provisions to ensure that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.

There are also provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.

Sinha said the code seeks to protect interest of workers who are the most vulnerable. “It enables workmen to initiate the insolvency process and they will be first in line to get the proceeds of liquidation,” he said.”

 

Simplification of Mutual Fund Plans

According to these article [1] , [2]  on Value Research SEBI is planning to ask the Mutual funds to simplify their plans and broadly categorize them into a small number of objectives. There are both pro and cons of this.

On the pro side it will help the investor by making different offering comparable. This will lead to increase in competition among Mutual Funds and improve their performance. On the other hand it can curb innovation. For example as discussed in this article Asset Management Companies (AMCs) are introducing funds which names having words like child care etc. These funds by invoking investor sentiment of children etc are trying to reduce the sensitivity of fund inflow to market conditions. Ultimately it is beneficial to both retail customers and the funds.

If the new regulation requires Mutual funds to not have more than one or two products in a given category then we might not see such innovations in future.

Side Pocket in Indian Mutual Fund Industry

This article says that SEBI is reluctant to provide rules for creation of side pockets.

“A side pocket is used by fund managers to separate stressed or risky assets from other investments and cash holdings. Fund houses create side pockets to ensure that while a proportion of investor money (in the scheme) linked to stressed assets gets locked until the fund recovers dues from a stressed company, investors are free to redeem the rest of their money if they choose to.”

The rational is that allowing isolation of risky assets from the rest fund would encourage fund managers to to take on more risk.

“Sebi is of the view that mandating the creation of a side pocket, to minimize the redemption pressure on the entire fund arising from their exposure to any particular company, could lead to some fund managers taking unnecessary risks,” said the chief executive officer of a large fund house, requesting anonymity. ”

However lack of rules can also lead to chaos and confusion among the mutual fund managers. Recently when Amtek Auto was downgraded JP Morgan had restricted redemption of Mutual Fund units and created a side pocket to isolate Amtek Auto from the rest of the portfolio.