On August 5, Sebi released a discussion paper to tighten regulations on algo trading to ensure fair play and has sought public comments by August 31.

1. What is algorithmic trading?

Algorithmic trading (algo) or high frequency trading (HFT) involves use of advanced mathe matical models-based software programs to execute orders at superfast speed. HFT is a form of algorithmic trading.

This software is usually used by big institutional investors. Critics feel us ers of HFT have a clear advantage over others, mainly retail investors, who do not have access to this facility.

Algorithmic trading constitutes about 50% of trading in cash and derivative segments in India compared to 80 90% in developed mar kets like the US and the UK. Besides being popu lar with high frequency traders because of order execution at a faster pace, it is also a good source of revenue for exchanges. Around 90-95% of BSE's order flow is generated through algo rithmic trading.

2. What is Sebi's position on algo trading?

Sebi has said it will be careful while bringing in speed bumps to algo trading. In a recent discussion paper, Sebi has proposed measures to take away the advantages that algo traders enjoy over others. Sebi plans to introduce measures such as minimum resting time for orders, speed bumps to delay order matching, frequent batch auctions, randomisation of orders, maximum order-totrade ratio requirement, review of tick-by-tick data and separate cues for co-location and non-co-location orders.While seeking comments on the proposal, the regulator has said it will take into account views from all stakeholders before putting final guidelines in place. In the past, there has been a debate among regulators globally to put some restrictions on algorithmic trading, but if the measures suggested by Sebi are implemented, it would be the first such instance by a regulator to curb the practice.

3. What could happen if these measures are implemented?

Market experts believe these measures may lead to a drop in liquidity in Indian markets.Besides hurting liquidity , the measures could also lead to increase in cost of trading on account of an increase in impact cost, they said. Any major slowdown in trading may lead to Indian markets losing out on the shift in FIIs trading volume outside India