Co-location brokers set to lose their edge over retail investors

Brokers who are using co-location services offered by India's stock exchanges may soon lose their speed edge, as the Securities & Exchange Board of India (SEBI) on Friday proposed rules that will put orders by retail investors on a par with large brokerages that use trading technology to their advantage.

The loopholes in market regulator SEBI's rules were exposed by the systems crash on 5 October last year, when the Nifty fell over 15 per cent within minutes because of erroneous orders.

India's three stock exchanges - the Bombay Stock Exchange, the National Stock Exchange, and MCX-SX - allow large brokerages to put their trading servers at the same location where the bourse's main servers are placed. This is called co-location, or co-lo.

This facility brings down the time taken by co-lo servers to execute trades. However, since exchanges charge higher fees for co-located servers, retail investors cannot afford them, and hence often have to buy a stock at a higher price or sell at a lower price than brokerages with co-lo servers.

The regulator has now clarified that all the bourses should create a trading software that would allow a queue of similar orders with one order from co-lo server following an order from a non-co-lo server, thus giving retail investors equal chance of getting a better price.

''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 a SEBI release.

The regulator has invited suggestions from market participants by the end of May.