RBI worried about trends in algorithmic trading in India: Report

MUMBAI: RBI worries about the trends in algorithmic trading in India. With nearly 90% of the orders placed getting cancelled, the RBI suspects foul play by some. Also, the more than doubling of total algo trades is also worrisome, says the central bank in the Financial Stability report issued on Thursday.

“The increased complexities of algorithm coding and reduction in latency due to faster communication platforms needs focussed monitoring as they may pose risks in the form of increased possibilities of error trades and market manipulations,” the report says.

“The share of cancelled Algo orders in the total orders in the total number of cancelled orders is around 90% creates concerns relating to systemic risks.” Algo trading allows traders to use electronic platforms for entering trading orders with a computer programme called algorithm with high frequency but without human intervention mostly. This was introduced in India in April 2008. Capital market regulator Securities and Exchange Board of India regulate it.

Volumes in Algo trading and high frequency trading (HFT) increased substantially in the cash segment of the Indian equity market to 40% of total trades in two stock exchanges till March this year from 17% (NSE) and 11% of trades ( BSE) respectively in 2001.

“There have been certain instances of abnormal market movements in India stocks, which have been attributed, by market experts, to algo trading/HFT,” it says. HTF is a special class of Algo trading, in which computers make elaborate decisions to initiate order based on electronically accessed information at a supersonic speed, much higher than humanely processed information.