SEBI lays out the requirements on brokers and exchanges for smart order routing facilities.
On Sept 27, the Securities and Exchange Board of India (SEBI) announced its approval of Smart Order Routing (SOR) for Indian securities. According to the circular (CIR/MRD/DP/26/2010), released by the Indian securities regulator, brokers will be able to offer SOR facilities to their clients, provided they comply with SEBI guidelines, including mandatory pre-trade risk-testing, best execution, third party system audits and full audit trails. All brokers must apply to the respective exchanges to have their SOR facility approved – applications which must be approved or denied within 30 days of submission.
“The step to permit Smart Order Routing (SOR) by SEBI is a welcome move in taking Indian capital markets in step with the developed US & European markets,” said a spokesman for Tata Consultancy Services. “Since the launch of DMA and algorithmic trading in India, there has been a growing demand from broking houses and institutional clients to permit SOR so that clients can benefit from best execution and improved liquidity.”
SEBI further stipulated that Indian brokers must locate their servers in India and enter into “specific agreement” with their clients regarding smart order routing. Rajeev Saptarshi, COO, Kotak Institutional Equities said, “SOR was one of the most sought after features in the Indian markets, keeping in mind the dual listing of stocks. SOR will enable execution of orders at the best venue and should help improve performance of liquidity seeking and arbitrage algorithms.”
SEBI also required exchanges to synchronize clocks ahead of each trading day and begin time-stamping market data feeds within three months of implementing SOR. Additionally, exchanges must strengthen their investor grievance channels and install SOR surveillance systems. Kotak’s Saptarshi predicts “the cost for compliance, market data and storage will grow exponentially.”
The Bombay Stock Exchange welcomed the development. “BSE is very pleased with this important regulatory change in the securities market environment in India,” said James E. Shapiro, Head – Market Development at Bombay Stock Exchange. “We believe it is good for liquidity in the Indian markets and — most importantly — good for customers hoping to achieve best execution in India’s multi-exchange competitive environment.”
According to Tata Consultancy Services, “while the introduction of SOR is beneficial to the clients, it would require brokers to invest in systems so as to prove ‘best execution’ to the client. A service like a consolidated tape from a neutral third party would go a long way in proving best execution.”