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.

Differences in commissions to Insurance and Mutual Fund Agents

Here is an interesting article on differences in commission structure of Insurance and Mutual fund agents. The initial commission paid to an insurance agent is very high but all the subsequent commissions he receives are only a percentage of his new premiums. On the other hand initial commissions paid to Mutual Funds are very low. However they earn increasing amounts of commission as they receive a percentage of accumulated corpus in subsequent periods. I am reproducing the graph from the article which explains the above fact. On a Net Present Value (NPV) basis there may not be much difference between the total commissions paid for both the products.

 

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Picture taken from Economic times.

 

It would be interesting to find what factors are responsible for the differences in commission structure between the two products. Obviously the existing structure helps the Mutual funds in matching their revenue and expenditure stream. Also high initial payout might lead to high turnover. I have written on a similar topic on front end load ban here. Are there any other reasons?

In India the number of insurance agents is very high compared to the number of mutual fund agents. Maybe the immediate compensation provided by insurance products attracts more number of agents.  Remember in India in the retail segment, agents play a very significant role. So would it be more beneficial for the Mutual fund industry to shift from their existing commission structure to the commission structure of Insurance industry to attract more agents? The present commission structure of mutual funds is followed world over but that doesn’t mean we cant follow a new structure.

Economics of job market

This is an interesting article in mint on how looks can affect your job prospects.  An excerpt from the article..

“Most of us, regardless of our professed attitudes, prefer as customers to buy from better-looking salespeople, as jurors to listen to better-looking attorneys, as voters to be led by better-looking politicians, as students to learn from better-looking professors,” wrote Hamermesh. “This is not a matter of evil employers refusing to hire the ugly: in our roles as workers, customers and potential lovers, we are all responsible for these effects.”

This is an interesting point, if we as customers are biased towards buying products from better looking salesperson isn’t it logical for the businesses to discriminate candidates based on looks? Earlier research has shown that discrimination is not only restricted to looks but also race, cast etc. You can find another excellent article on this topic here.

As a cautionary note we should keep in mind that if ones race, cast etc are correlated with their, let’s say, attitude towards work then it makes perfect sense for the recruiters to discriminate job applicants based on these factors. It means the recruiters are not discriminating because they are biased against any group but because they don’t have better tools to reduce the information asymmetry between themselves and the job applicant regarding his capabilities. In future I would like to see some research on how one can reduce this information asymmetry between the recruiters and job applicants.

SEBI circular on Mutual Fund transparency

SEBI has issued a new circular (SEBI/HO/IMD/DF2/CIR/P/2016/42) on 18th March,2016 requesting Mutual Funds(MFs) to provide certain additional disclosures to its investors. A lot of people have already talked about the circular. For example here, here and here. The original circular itself can be found here.

The basic idea of the circular is that investors should have an idea of how much commission they are paying to the distributors. However this information alone won’t be of any help if the investors are not aware of any alternatives (read direct plans) to avoid paying those commissions. Hence the circular also mandates the funds to compare the standard with direct plan of the same scheme. Here SEBI is assuming that the investors will compare the commission paid by them with the service they are receiving from the adviser and accordingly decide whether to shift to direct plan or not. The negatives effects of this piece of regulation has already been discussed extensively in the above articles I have mentioned. However I beg to differ with those authors.

Earlier in 2009 when SEBI had banned front end loads of all mutual funds there was a similar hue and cry over how it will be detrimental to the development of industry. However this paper finds no evidence that the regulation has reduced inflow into mutual funds. Similarly when direct plans where introduced a lot of people were worried that distributors would be out of business. I think people might be over reacting to even the current regulation.

The circular also has requested funds to declare information regarding Fund manager’s name, his/her tenure and compensation; Board of directors, key personnel and Fund managers investment in the fund etc. Academic research has shown that these factors can affect fund performance. At first it might seem unrealistic that investors will use this information. But over time they will develop casual relationship between these variables and fund performance in their mind and use it subconsciously. Hence I don’t think it is a useless piece of regulation.

Only time will tell as to how this new regulation affects market but I am hopeful it won’t be as gloomy as others predict.