RBI- Caution note on algorithmic trading

The RBI today once again cautioned against the rapid rise in algorithmic and high-frequency trading in the country’s securities markets.

According to the Financial Stability Report, volumes in algo and high-frequency trading increased substantially in the cash segment of the equity markets. It rose from 17 per cent on the NSE and 11 per cent on the BSE in 2011 to around 40 per cent of the total trade in both the exchanges in March 2015.

The report said the share of cancelled algo orders in the total number of cancelled orders was around 90 per cent, thereby creating concerns related to “systemic risks”.

Algorithmic trading, or “algo”, refers to orders generated at a super-fast speed through the use of advanced mathematical models that involve automated execution of trade.

Algo trading was introduced in India in April 2008. It is subject to Sebi regulations issued in March 2012 and May 2013. These regulations include a list of minimum order level checks to be performed on algorithmic orders, a consolidated audit trail and framework for penalising cases of high order-to-trade ratios.

“The concerns emanating from the rapid rise in algorithmic and high-frequency trading in recent years highlight the need for caution for the securities markets, even as significant steps have been taken to move towards risk-based supervision, preventing and dealing with illegal money-raising activities and insider trading,” the report said.

According to the report, algo and high-frequency trading have undergone substantial changes in the financial markets because of developments in information processing and communications technologies over the last two to three decades.

However, the report noted that the increased complexities of algorithm coding because of faster communication platforms need focussed monitoring as they might pose risks in the form of increased possibilities of error trades and market manipulation.

Bank borrow norms

Easing norms for accessing foreign funds, the RBI today allowed banks to borrow from international financial institutions for general banking business without seeking its permission. Such borrowings should be for general banking business and not for capital augmentation, the RBI said.