India's "flash boys" fret over proposed automated trading curbs

India's "flash boys", or high-frequency traders, are pushing back against the domestic markets regulator and in some cases putting investments in new strategies on hold, saying proposed tighter rules could render their ultra-fast systems redundant.

The Securities and Exchange Board of India (SEBI) last month proposed regulating hyper-fast stock trading, amid concerns that investors lacking access to such advanced and expensive systems were being disadvantaged.

But trading firms contend such rules could hurt liquidity and destabilise Indian markets.

"If you keep changing the rules of the game every now and then, people are going to worry about how much money they want to sink in," said Rajesh Baheti, managing director at Crosseas Capital, adding that investments in new high frequency trading (HFT) strategies were on hold.

"HFT's not something that gives you instant returns. There's a huge investment in technology."

India has been a land of opportunity for HFT players as high transaction costs in some European markets and greater competition in the United States have encouraged international HFT companies to flock to India in recent years.

Algo, or automated computer-driven trading of which HFT is a subset, accounts for over 40 percent of executed orders in India, above an estimated average of 32 percent across Asian markets in 2015, according to market research firm Aite Group.

The proposed rules, though, are forcing many to hit the pause button. Five HFT firms have told Reuters they are holding back new investments given the uncertainties surrounding the proposed regulations.

"We were about to set up a new strategy and we were ready to deploy capital, and build a team of traders and programmers, but if these changes are implemented that strategy would effectively be zero," said a Delhi-based industry insider.

"NEGATIVE CONSEQUENCES"

SEBI has said it was looking at potential limits on so-called algo traders, including "speed bumps" to randomly delay execution of some orders, and forcing exchanges to take orders from co-located servers and other sources alternatively, removing another advantage enjoyed by HFT platforms.

The deadline for submitting responses to SEBI ended on Aug. 31. SEBI has said it planned to analyze the responses and hold discussions before creating a regulatory framework.

"We will not do anything in haste," Manoj Kumar, SEBI's head of Market Regulation, told a conference last week. "We will keep on consulting everybody."

But in a letter sent to SEBI dated Aug. 31, the global Futures Industry Association, which represents major HFT firms including Citadel, IMC and Optiver, raised a number of concerns.

It said they may result in "potentially detrimental impacts to market liquidity, increased risk and increased trading costs for investors which outweigh potential regulatory benefits."

WAITING GAME

In the discussion paper, SEBI noted that while literature existed showing algo trading helped tighten spreads and boost liquidity, research also showed it may raise costs for non-algo traders and increase the risk of "flash crashes".

Regulators in the United States, Europe and elsewhere have moved to crack down on high-speed trading, responding to fears that the practice distorts markets, ups risks and disadvantages retail and institutional investors.

Authorities in Asia-Pacific markets, where HFT is generally less of a factor, have also stepped up scrutiny of algo trading over the past two years, and in some cases introduced curbs to curtail it.

Most notably, China's securities watchdog has investigated a number of automated trading firms and proposed far-reaching electronic trading restrictions after the market rout of 2015.

    The Bombay Stock Exchange (BSE) Brokers Forum, in a letter to SEBI last week, appealed for more time to deliberate.

"The steering committee of the forum looking into the matter was divided on the issue," said Alok Churiwala, vice-chairman of the forum. "There are credible reasons on both sides of the issue."

The proposals, if implemented, could take a chunk out of the revenues of BSE and the National Stock Exchange, India's biggest bourse, just as both exchanges are gearing up to go public.

Some foreign players are also wary of the proposed changes, concerned they could widen spreads and make markets more prone to sudden swings, all at a time when India is increasingly attractive to overseas investors.

"The proposed rules could definitely hurt foreign investor sentiment around Indian markets," said one North American institutional investor.

Some hope the pushback from the HFT industry could encourage SEBI to reconsider its plans.

"Once they see these comments come in, they'll probably have a fresh look," said PwC partner Suresh Swamy, who consults for some HFT firms. "SEBI should think hard before implementing any of these provisions."