Sebi clears smart order routing for all investors

Capital market regulator the Securities and Exchange Board of India (Sebi) has approved the launch of smart order routing to every class of investors on stock exchanges, putting an end to the conflict between the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

By using smart order routing technology, investors will be able to obtain the best possible price while buying or selling shares, similar to what is being done manually by stock brokers, except that this technology makes it much faster to execute. Stock brokers say that smart order routing determines which exchanges offer the best price at any given time. Speed is the key to the success of programme trading. If the price feed is not fast enough, the software will be unable to capitalise on some of the opportunities that last for a second or less.

The BSE had said in a public forum that the NSE was dragging its feet on allowing smart order routing on fears that it may lose some of the orders, if this was allowed. The NSE, on its part, said that security concerns related to audit trail had prompted a second look at the proposal.

“Smart order routing would help in better price discovery and also increase electronic trading volume,” Parag Gude, MD-consolidated equities, Morgan Stanley

Algorithm-based trading or programme trading has really not taken off in a big way in India and one reason, say stock brokers, is a lack of liquidity beyond the top 15-20 most actively-traded stocks. The other reason is the systems at stock exchanges are not equipped to handle very heavy trade volumes when the market is unusually active.

According to Sebi, stock brokers, who are interested in offering the smart order routing facility, will have to apply to the respective stock exchanges, which, in turn, will have to communicate their decision to brokers within 30 days. Brokers will also have to submit a third-party system audit of its smart order routing system and software.

Stock exchanges will disseminate a list of approved system auditors (CISA or equivalent) qualified to undertake such system audits. System audit of the smart order routing systems and software will be periodically carried out by brokers, and certificate, in this regard will have to be submitted to the exchange.

Brokers will have to provide an undertaking that the new system will route orders in a neutral manner. They have to provide an alternative mode of trading system in case of failure, besides maintaining logs to facilitate an audit trail.

Stock exchanges will have to provide a unique identification number (UID) for orders placed through this facility and maintain data on all orders and trades. Within three months from implementation of the smart order routing, bourses will have to ensure that a system is put in place to time stamp market data feed that’s disseminated to the market.

The regulator has also stipulated that apart from strengthening investor grievance cells to address complaints, exchanges will also have to share necessary data as and when required in order to facilitate necessary examination in case of investor complaints.

The broker server routing orders will have to be located in India. The markets regulator has also asked stock exchanges to communicate the status of the implementation of the provisions of this circular in the monthly development report.

Source: The Economics Times