India is having its own 'Flash Boys' moment

The Mumbai-based National Exchange of India (NSE) could be taking a page out of the “Flash Boys” rule book.

With 40% of all stock trading volume on the exchange now coming from high frequency and algorithmic transactions, up from low single digits five years ago, rumours abound of collusion and high frequency traders gaining preferential access at the NSE.

The Securities & Exchange Board of India (SEBI) is looking into measures to slow down high frequency trading over the next three months, according to its chairman, as reported in the Economic Times of India. Measures include enacting a fraction-of-a-second speed bump, alternating electronic trades and manual orders, and banning traders from cancelling an algorithmic order until it’s confirmed by the bourse. That last measure is intended to counter the common, manipulative practice of briefly putting in an order before cancelling it.

The SEBI is also considering randomizing orders rather than executing them in the order they arrive at the exchange and publicizing order-book information to prevent preferential treatment by the NSE.

The regulator plans to release a discussion paper on the proposed changes within a month and could implement the final measures before the end of the year.

This is a familiar story. In the US, the Investors Exchange (IEX) was founded by Brad Katsuyama three years ago in response to similarly questionable trading practices that have been widely used across Wall Street, a saga memorialised in Michael Lewis’ book “Flash Boys.” IEX aims to operate in a transparent manner to level the playing field for traders. Strategies include those proposed by SEBI above, including publishing order book information and delaying market pricing data via a speed bump.

After a controversial battle that attracted both praise and criticism across Wall Street, the SEC approved IEX to run a US stock exchange.

It remains to be seen what happens in India, but no one can fault the SEBI for trying to run a fair exchange.

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