Author name: CBCL

[By Modit Mendiratta and Mahak Agarwal] The authors are students of Gujarat National Law University.   Introduction The Securities and Exchange Board of India (SEBI) has recently proposed extending the trading hours for equity derivatives in India. The proposal has garnered mixed reactions from market participants and experts. Currently, the trading hours for equity derivatives on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are from 9:00 am to 3:30 pm Indian Standard Time (IST). However, the proposed change would extend the trading hours to 5:00 pm IST, allowing for an additional hour and a half of trading. The proposed extension of trading hours is aimed at aligning India’s trading hours with other global markets and catering to the needs of foreign investors who are active during these extended hours. Additionally, the extension would enable market participants to react to any global events that may have an impact on Indian markets. What does it mean for Investors? Extending trading hours in the equity segment in India could have both positive and negative impacts on investors. Increased liquidity and trading opportunities could make it easier for investors to enter and exit trades, potentially reducing bid-ask spreads and transaction costs. However, increased volatility, higher trading costs, and increased risk of errors could make the market riskier for investors, particularly for retail investors who may not have the same level of resources as institutional investors. The actual impact on investors would depend on factors such as the specific length of the extended trading hours, the reaction of market participants, and the regulatory framework in place to monitor and manage the market.[i] The extension of trading hours could attract more market participants, leading to higher trading volumes, and increased liquidity in the market. Increased liquidity could improve the efficiency of the market and reduce bid-ask spreads, making it easier for investors to enter and exit trades. Longer trading hours could allow for more time for market participants to react to news and events, leading to improved accuracy in price discovery. This could result in better pricing of securities, reducing the likelihood of mispricing’s, and reducing the overall risk of investing.[ii] Longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability in the market. [iii] Positive Impacts of Extended Trading Hours Extending trading hours in the Indian market could have several potential benefits. Firstly, it could lead to increased liquidity in the market by attracting more market participants, resulting in higher trading volumes. This increase in liquidity could help to improve the efficiency of the market and reduce bid-ask spreads, which could make it easier for investors to enter and exit trades. Secondly, longer trading hours could lead to improved price discovery. This could happen because market participants would have more time to react to news and events, which could lead to a more accurate pricing of securities. As a result, the likelihood of mispricing’s could decrease, reducing the overall risk of investing. Thirdly, longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability. Traders could also benefit from more time to adjust their positions in response to market news or events, which could reduce their overall risk exposure. Lastly, extending trading hours would align the Indian market with global norms, as many other major stock exchanges around the world already have extended trading hours. This could make the Indian market more attractive to international investors, potentially leading to increased foreign investment. Overall, extending trading hours in the Indian market could have several benefits, including increased liquidity, improved price discovery, increased trading opportunities, and alignment with global markets. Negative Impacts of Extended Trading Hours Extending trading hours in the market could have potential drawbacks. Firstly, it could lead to increased volatility, as traders would have more time to react to news and events, potentially leading to wider price swings. This increased volatility could make the market riskier for investors and create greater uncertainty. Secondly, longer trading hours could lead to higher trading costs for market participants. They would need to dedicate more time and resources to monitoring and participating in the market, which could be particularly challenging for retail investors who may not have the same level of resources as institutional investors. Thirdly, longer trading hours could increase the risk of errors, as traders and market participants may become fatigued or less attentive during extended sessions. This could lead to mistakes that could have significant consequences for both the individual and the market as a whole. Lastly, extending trading hours could have an impact on the work-life balance of employees in the financial sector. They may need to work longer hours to keep up with the extended trading schedule, which could have negative consequences for employee morale, productivity, and overall well-being. Overall, extending trading hours in the market could have potential drawbacks, including increased volatility, higher trading costs, increased risk of errors, and potential impact on employees. Comparison of Indian Trading Hours with the global markets The Indian stock market currently operates for six and a half hours, from 9:00 am to 3:30 pm Indian Standard Time. In comparison, many other major stock exchanges around the world have longer trading hours. For example, the New York Stock Exchange (NYSE) and the NASDAQ operate for 6.5 hours from 9:30 am to 4:00 pm Eastern Standard Time. The London Stock Exchange operates for 8.5 hours from 8:00 am to 4:30 pm Greenwich Mean Time. It is worth noting that while some exchanges have longer trading hours, others have shorter trading hours than the Indian market. For example, the Australian Securities Exchange operates for 6 hours from 10:00 am to 4:00 pm Australian Eastern Daylight Time. Overall, the trading hours of stock exchanges around the world vary widely, and there is no one-size-fits-all approach. The decision to extend trading hours in the equity segment in India will require careful consideration of the potential benefits and drawbacks,

[By Nirukta Krishnan and Aditi Kotecha] The authors are students of Hidayatullah National Law University.   OVERVIEW: In light of the Public Interest Litigations filed by four social activists after the recent shorting of the Adani Group Stocks, questions are being raised once again concerning the ban on short selling and whether the regulatory authority is adequately equipped to deal with the potential negative consequences of short selling on the market. Short selling has for a long time been the subject of polarising opinions. On one hand, supporters consider it a fundamental practice of the market which keeps the market alive while critics believe that it is a highly volatile practice.  This article thus presents a critical analysis of the short selling laws in India operating at present and also attempts to provide certain recommendations with respect to changes that can be made to the existing regime keeping in view the recent Hindenburg report and the short selling of Adani stocks. MEANING- In simple terms, short selling is a practice where the short seller borrows the stock in terms of derivatives from a broker at a certain price and sells it in the market. When the price of the stock goes down, they proceed to buy it back at the lowered price and keep the difference. SEBI thus defines it as “a sale of a security that the seller does not own”. On a purely technical ground, there is nothing wrong with the practice. Buying and selling stocks in this manner through derivatives like futures and options is not wrong per se but the issue arises when this shorting is done to manipulate stock prices. In this case speculations are being made by experts that Anderson purposely partook in short selling because he knew the instability that would be caused by his report, which would jeopardize investor confidence and cause mass panic thus also leading to a sharp decline in price. This, according to them, is a clear attempt at manipulation. This is precisely the matter surrounding the Adani-Hindenburg debacle. NATHAN ANDERSON- MANIPULATION OR COINCIDENCE? The biggest reason why short selling came into question again is because of the report published by the Hindenburg Research group which caused complete mayhem amongst investors of the Adani Group amid allegations of fraud and manipulation among other things. After the dust settled with regard to the contents of the report itself, eyes turned to the person at the very center of it all – Nathan Anderson– who founded the organization and had previously conducted similar crusades against many large entities. While the report refused to publish the specifics of how they pulled it all off, they mentioned that they had obtained a “short position through US-traded bonds and non-Indian traded derivative instruments”. In direct terms, Anderson purchased and shorted US bonds of Adani after which he proceeded to release his report. With the magnitude of allegations contained in the report, the credit went down which then adversely affected the value of the bonds and securities of Adani. During this time when the market was distressed, he then purchased the bonds again at a lower price thus making a profit from the difference in the purchase and sale. The other method is mainly speculative, but many critics who have been trying to analyze how Anderson achieved this result, have suggested that he probably approached entities like global banks that trade in India and entered into a stock futures contract with them, who then entered the Indian market and shorted the stocks. WHAT DO INDIAN LAWS SAY ABOUT SHORT-SELLING? The discussion on short-selling first took place in 1996 when SEBI constituted a committee under Shri BD Shah. The committee suggested rules and regulations be put in place to regulate the trading practice in India. It was temporarily banned in 1998 and 2001. However, it was finally reviewed in 2003 by the Secondary Market Advisory Committee (SMAC) which took into consideration the practices followed in other states and permitted it on certain conditions. Short-selling poses a potential risk to the market and may lead to a rampant decline, if not regulated. SEBI and the stock exchanges in India have collectively released specific rules and guidelines to be followed while short-selling a stock. India and several other developed countries have not banned short-selling, and the International Organization of Securities Commissions (IOSCO) has also suggested that the practice be regulated rather than prohibited. Currently, in India, retail investors and institutional investors (such as mutual funds, FIIs, banks, insurance companies, etc.) are free to short-sell, provided derivative products are available of that stock. They (institutional investors) are required to disclose at the time of placement itself whether the stock is a short sale and their ability to borrow those stocks to the satisfaction of the broker, the same is not the case with retail investors. They can disclose this at the end of the trading hours on the day of the transaction. In addition to this, naked short-selling and day trading is prohibited. The present lending and borrowing scheme in India operates on clearing corporations/houses (CC/CH) of the stock exchanges, leaving very little scope for the investors to capitalize on the demand for securities. A  lending and borrowing system with CC/CH acting as Approved Intermediaries can be brought in. . However, appointing AIs must be done carefully, starting with appointing Banks as custodians in the first stage and so on. FPIs and Foreign Institutional Investors are explicitly prohibited from short selling as per the guidelines. However, foreign entities still trade in India through some other corporations or organizations which are still allowed to trade. The regulations do not go up to the source and limit themselves to regulating the direct intermediaries which do not solve the problem. Internationally, it is mostly seen that the securities market does not directly regulate the lending and borrowing processes because they are essentially held over the counter. The custodians and depositors run these lending and borrowing institutions. So, if India goes for

[By Jay Shah and Aditya Sharma] The authors are students of Gujarat National Law University   Introduction Algorithmic trading refers to a method of trading wherein an algorithm is used to execute trade setups on basis of information as input by the trader in terms of, time, price, quantity and other other mathematical models. Essentially, algorithms scan the markets for appropriate trade setups, and when they find the proper ones, trades are executed and managed as per the instructions specified in the codes. Algo trading is incorporated as they generate profits faster than humans can and allow the user to take advantage of small directional movement of any stock. Stance of the Regulator: Evolution Securities and Exchange Board of India (‘SEBI’) is devising dedicated guidelines or regulations to govern how algo trading is to work and how say, in the event of an unlawful act, the remedy is to be exercised by the aggrieved when algo-trading takes centre stage. SEBI has released multiple circulars in attempt to regulate to algo trading. These standalone guidelines released in 2012, 2013 and 2015 deal with redressal mechanism, monitoring process, measures to put in place to disincentivize high daily order-to-trade ratio and procedure for auditing algo trading systems.  Further, the Discussion Paper of 2016 attempted to clarify the various technical concepts relating to algo trading. In this paper, algo trading was touted to be the broader concept, which provides greater speed to stock trading and also offers anonymity.  SEBI’s outlook towards algo-trading becomes clearer from the discussions that took place in April, 2018. These showed SEBI’s intent to restrict unfair use of algo trading. In this April 2018 discussion, SEBI proposed to discourage algo traders from placing huge orders and then subsequently cancelling them within a short span of time by prescribing a ‘minimum resting time’. This step was intended to lower down the instances of frequent cancellation of orders by the traders that intends to create phantom liquidity in the market. Post this, the Consultation Paper shifted the focus to retail investors. It proposed a potential framework that may be followed to engage in algo trading, which includes application programming interface (‘API’) access and automation of trades. In this backdrop , came a press release in June, 2022. The Consultation Paper seeks to classify all orders emanating from an API as an algo order and be subject to control by the stock broker. The APIs shall be tagged with the unique algo ID provided by the exchange. Thus, the stock broker shall have a  mandate to obtain approval of all the algorithms from the concerned exchange irrespective of whether the same is used for actual trading or not.. As per  the authors,    we propose a scenario  wherein  the stock brokers shoulder the responsibility of procuring requisite approvals in the cases of deployment of algorithmic trading by third-party algo providers, in line with the Consultation Paper. The stock brokers however, argue that it would be a tedious task for them to obtain approvals of algorithms enabled through APIs, since there can be numerous customized algo strategies that could be deployed by third-party vendors. Another circular, issued in September, 2022 also points to the cautious stance SEBI has long taken about algo trading. Vide this circular, SEBI issued strict guidelines for Stock Brokers providing algorithmic trading services. In brief, the same states that Stock Brokers who provide algorithmic trading services shall not – Make any reference to the past or expected future return/ performance of the algorithm. Associate with any platform providing any reference to the past or expected future return/ performance of the algorithm. In addition, Stock Brokers were required to monitor the compliance of this circular and submit a compliance report before SEBI before 01.11.2022. Outlook of the SEC Securities Exchange Commission (‘SEC’) actions in the U.S. have been on various occasions replicated by SEBI after appropriate customisations in the Indian securities market. It is no surprise that SEBI sought guidance from the SEC on the matter. In August 2020, the SEC released a staff report, which dealt with algorithmic trading in the U.S. capital markets. The report acknowledged the rapid growth of algo trading and the object of the report was to ensure that the interest of investors is not compromised. The report states that SEC undertook various measures, and is constantly attempting to increase transparency, mitigate volatility, enhance stability and otherwise improve market integrity. Apart from this SEC does not have a dedicated set of provisions that govern algo trading. Further, the SEC’s outlook is a little more relaxed in comparison to that of SEBI, as SEC in the report mentioned above discusses at great length the benefits brought on the table by algo trading. The SEC also opines that the efficacy of such mechanisms was greatly highlighted by the Covid-19 pandemic as well. Penalty Mechanism The parameters governing the imposition of penalty are unclear under the limited SEBI jurisprudence. The same is generally left at the behest of the stock exchanges. The NSE and the BSE have their threshold for levying penal charges when algorithms are used to manipulate the market. The guidelines governing such imposition have been laid down by the SEBI via its circular, as discussed above. The onus put on the stock exchanges in this respect is grave. SEBI, in this regard, has ensured that the stock exchanges are doing the needful to monitor algorithmic trading in isolation and its overall impact on market operations. SEBI’s strict imposition of penalty on the NSE in the matter of NSE Dark Fibre signifies the regulator’s stance in this respect. There is an inherent urge to regulate algo trading; however, with standalone circulars and notifications, only so much can be done. Even in terms of penalty imposition, which could very well become the bone of contention in matters dealing with algo trading, there is little clarity. For this particular instance, the violation was traced in a Circular from March 2012. Regarding penalty imposition, the regime in the EU must