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Charts & Analysis

SEBI to Probe Algo Traders, but STT May go

After the BSE cancelled all futures trades in Mahurat trading on Diwali due to a rogue algo program, SEBI has decided to investigate high frequency trading for risk management.

The stock market regulator, the Securities and Exchange Board of India (SEBI), said that it will do a thorough review of the risk management system in high frequency or algorithmic trading. Such an exercise aims to stop repetition of the Muhurat trading mishap on the Bombay Stock Exchange (BSE).

On October 26, the BSE was forced to annul all the derivatives trades. It said that it observed large movements in Sensex futures during the special session, conducted as Muhurat trading, for Diwali. This has again raised the question of risk management measures in high frequency trading.

But the reason heard that the BSE annulled all trades was that one member stood to lose 100 cr. That member should have been forced to lose that 100 cr. , one thinks, to send a message that if you screw up, it’s your problem. But no, now they will investigate if algo traders have “risk control”.

I’ll tell you what is likely to happen. SEBI will ask for an audit. The algos are too complex to be actually revealed, so each algo firm will do some random demonstration of how well their risk functions work, and SEBI will be satisfied. Nothing will change; if they try to change the rules at the exchange itself, in terms of capital requirements, even regular prop shops will get affected and that is a no-no.

More interesting is this part:

The SEBI chairman endorsed the concerns of the trading community that trading costs, of buying and selling shares, have gone up. “Time has come to re-look. SEBI is in dialogue with the Government, which will take steps at an appropriate time,” he assured.

The Finance Ministry is working on a proposal to reduce the Securities Transaction Tax (STT), which is levied on buying and selling of shares in the cash and the derivatives markets. At the same time, the Ministry plans to amend the Stamp Duty Act to have a uniform duty nationwide.

Removing STT will hugely help algo traders, most of whom are darn scared of doing option trades that involve being long options to expiry, simply because STT takes away everything. I’ll expand if anyone’s interested.

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