Saturday, May 4, 2013

Co-located brokers set to lose edge

May 4, 2013,


The Securities and Exchange Board of India (Sebi) is contemplating regulation of a 'low latency' technology so that brokers who are not co-located are not crowded out.

Co-location, or co-hosting, is a service offered by a stock exchange or by exchange-authorised third-parties to its stock brokers to locate their trading or data-vending systems within the stock exchange's premises.

This facilitates speedy completion of the trading process, benefiting from lower latency.

The time taken for orders entered by these brokers to reach the exchange and for data disseminated by exchange to brokers comes down.

The market regulator has in its discussion paper proposed changes in the order handling architecture that would be fair to all brokers, irrespective of whether they avail of co-location.

"With a view to ensure that stock brokers, and thereby the investors, who are not co-located have fair and equitable access to the stock exchange's trading systems, stock exchanges facilitating co-location or proximity hosting shall implement an order handling architecture comprising of two separate queues for co-located and non-co located orders such that orders are picked up from each queue alternatively," said the paper.

Sebi has pointed out that regulators worldwide are considering steps to disincentivise the unfair advantage that a few brokerages have over others. According to it, these global regulators appear to be considering two options – either prohibit stock exchanges from offering such service or regulate the same to make it fair to all.

In February, 73.88% and 94.16% of the total NSE orders in the cash and derivatives segments, respectively, were received using co-location. On BSE, however, the proportion of orders received using this method stood at 7.06% and 17.96% in the cash and derivatives segment, respectively.

"Stock exchanges shall ensure that all stock brokers and data vendors located at co-location experience similar latency between their systems and the stock exchange's trading platform. Stock exchanges shall also avoid situation of monopolising rack space by certain stock brokers and ensure that the size of the proximity hosting space is sufficient to accommodate all who are desirous of availing the facility" said the release.

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