HFT trade: SEBI, global peers in talks to check misuse

Regulators across the globe are grappling with advancement in technology and finding it challenging to control it as the direction of attacks is unknown, according to UK Sinha, Chairman, SEBI.

Speaking at the Risk summit organised by Thomson Reuters in Mumbai on Thursday, Sinha said, “Technology has come at a level where it is posing a challenge for companies and for participants in the market and the regulator.

“High frequency trading and co-location is one such area. Not only SEBI, but global regulators are today struggling to find out what is the best way to handle it.”

He observed that there is race to reduce latency (time taken for information to reach trader terminals from exchanges).

SEBI is actively participating in global discussions on HFT/algo, besides conducting its own discussions.

Cyber security Cyber security is another area of concern. It compromises the integrity of the market place, Sinha said.

Sinha ruled out introduction of new commodity derivative products till liquidity and risk management improves to the level of equity markets, adding that the spot market (physical market) was complex and was not under SEBI’s purview.

Sinha said SEBI was considering easing of the consent mechanism for ‘insignificant cases’. Consent mechanism entails disposal of cases by paying the prescribed penalty without admission or denial of guilt. On criticism of the regulators, Sinha felt there are two types of criticisms that a regulator faces — one, that the regulator is behind the curve while taking action on events such as the global credit crisis which was fair, and two, the regulator is ahead of the curve, the most recent being SEBI’s norms on disclosure of senior executive pay by mutual funds.

“Our success should be measured by how effective we are in supervision,” Sinha said.

Risk management measures He said SEBI had introduced several risk management measures such as margins at various levels — initial margin, mark-to-market margin, intra-day margin and extreme loss margin besides mandating segregation of client margins from that of the broker. It also suggested that email/SMS alerts of transactions executed be sent to clients immediately. It is an ongoing challenge.

Sinha said, “Challenges in the global economy included challenges from a large neighbouring country.” Finally, extra-territoriality was another area of concern where unfair practices committed in another legal jurisdiction could have implications for India (for instance misuse of Participatory Notes).

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