Algorithmic trading or Algo trading is a concept that the investing community embraced only in the last 5 years. Several platforms sell ‘algos’, which are basically strategies that have generated returns. All you have to do is click one button and the program takes care of your trades. Easy way to make money, right? Wrong! This is the easiest way to lose your hard-earned money. Read up on why SEBI is seeking to regulate algo trading.
What’s Happening?
Media reports have highlighted that around 50% of the daily trade volume in the Indian stock market arrives through an advanced form of algo trading. Algo trading is a pre-programmed strategy that executes buy and sell orders on its own. It studies various technical patterns, market patterns and conditions to make these orders. In recent years, it has been put to use excessively, which stands a concern. So far, there were no rules regarding algorithmic trading, but now it seems to pull the reins.
SEBI believes the unregulated algo trading is a risk to the retail investors in the market. It can unnecessarily manipulate the crowd by promising big returns. This could simply result in a market meltdown if strategies did not work. Recently, SEBI proposed that every algo trading programme must be approved by the exchanges before being deployed by the traders. SEBI is looking forward to developing a system to approve these programmes and deploy a unique ID to traders.
How Does It Bother You?
SEBI’s consultation paper has hurt traders and brokers since it won’t approve all algo strategies from now on. Earlier, it was easy to sell these programmes, but now it will be a regulated market. Additionally, algo programmers will also have to reveal the formula behind a particular algo strategy. These formulas were kept secret but not anymore. SEBI’s regulation will make pre-programmed trading strategies a complex affair.
Brokerage platforms will have to pay a higher compliance cost resulting in losing a significant number of retail investors. This could also result in sour sentiment in the market.
What Lies Ahead?
SEBI’s proposal is not a ban. Yes, many have argued that algo trading is the future, as is API-based transactions. In the future, algo trading could pick up demand momentum, but until then, the SEBI has proposed to look into it briefly. All SEBI wants is stock exchanges to know which orders are coming from which programme. If traders and brokers are scared of this, then there’s something that they are doing wrong.
