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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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.

 

RTA scam

This article talks about a financial fraud which didn’t receive much coverage in the main stream media. Some more coverage can be found here. I have covered the functioning of an RTA in my other article here. However RTA can in general also provide service to companies instead of just mutual funds discussed in the article.

Shares/dividends can remain unclaimed because the initial owner might have died and his family might not have been aware of this; or forgotten; or the ownership documents might have been lost and the owner didn’t want to perceive it because of cost benefit analysis. At times the owner might decide against putting effort to en cash a small dividend.

When a fraudster becomes aware (usually with the help of employees of RTA) of any unclaimed shares/dividends lying around for a long period of time he produces fake documents and claims himself to be the rightful owner. As long as the rightful owners are not aware of this and don’t approach the company there is very little chance of catching these rightful owners. The only way is to put stricter norms for claiming the shares.

SEBI looking to reduce algo-trading advantages

This article says that SEBI is contemplating introduction of measures to reduce the advantages of High Frequency traders.

“The regulator is also exploring the possibility of order randomization to limit the advantages enjoyed by these entities which have a speed advantage over others. All the orders received within a set period (for example: two seconds) would arrive at the exchange only after randomization, said the second person. Since the period is small, there would be limited impact on non-algorithmic trading players. This will, however, reduce the advantage of speed enjoyed by algorithmic traders since all orders would be intermingled before execution”

HFT has its own positives and negatives. Research has shown that HFT/algo-trading improves liquidity. However there is a increased threat of flash crashes. Google search on the topic gives some of these articles – here and here.

Frankly very less research has been done on HFT in India and needs a more thorough analysis. Any policy implementation without thorough analysis is not going to give desired results.