The community of traders in the Indian equities market is in a state of fear. The catalyst is the SEBI consultation paper on algorithmic trading. Concerns are raised by the regulation regarding how algo trading is promoted to inexperienced investors. The old guards fear that the regulator would outright outlaw algo trading India rather than go after the illicit traders and throw algo out. Investors had to pay a large fee to trade stocks under the licence raj, according to traders, who feel the SEBI is bringing that practice back. They are seeking further information on the matter as a result.
Trading with algorithms is not for everyone. It is acknowledged by brokers themselves as a tool for seasoned traders. When utilising it, one must be cautious. This is a result of the fact that modern financial markets depend on cutting-edge technology that is constantly being democratised. Algorithmic trading, to put it simply, is the process of carrying out buy and sell orders on the stock market using pre-programmed computer techniques that trade at microsecond intervals in accordance with pre-established regulations.
Young and inexperienced traders are comfortable with algorithmic trading and tech-savvy. In actuality, the usage of algo trading has significantly risen during the last few years. Algo trading often makes up 10% to 13% of overall market turnover. This figure increased to about 25% in March 2020, just before the stock market crash. This may have happened as a result of a domino effect, when algorithms started to fail. Although this is just a crazy idea, SEBI is worried about these problems since they might result in more market losses brought on by malicious algorithms.
In contrast, traders believe that Black Swan occurrences live up to their name and that no amount of regulation will be able to stop them. They think the regulator will just adopt stricter regulations, which would set the equity markets back by a decade, in order to protect individual investors from market disasters.
According to SEBI, the exchange should authorise all algorithms. Whether used by a broker or a customer, each algo strategy needs to be vetted and certified. According to the market regulator, all orders produced by an API should be categorised as algo orders and be under broker control. The stock exchange that approved it offers APIs for algo trading that are identified by a special ID. It requests that stock exchanges develop a method to make sure that only authorised algos with certain IDs are employed.
Brokerages are urged by SEBI to employ technological tools to ensure that adequate security measures are in place to prevent unauthorised algo tinkering. By entering into a contractual agreement with each third-party algo vendor whose services the broker is employing, brokers can either supply in-house algo strategies created by an approved vendor or outsource third-party algo vendor services.
The broker will also be in charge of any algos that originate from its APIs and will decide whether investors are eligible to utilise the algo facility before granting them access. Brokers will also be expected to include a thorough report on the algorithm checks they have done in the yearly system audit report they submit to the exchanges.
Possible Repercussions Of SEBI’S Guidelines
Experts predict that SEBI’s strategy would compel brokers to stop offering application programming interfaces (APIs). They have reservations about SEBI’s proposal to label every trade placed using an API as an algorithmic order. According to experts, this will make it necessary for the broker to seek exchange permission for each algo, which is a laborious and challenging procedure for any client that utilises APIs.
Will algorithmic trading be prohibited by the SEBI? At first look, it doesn’t appear to be the case. The market watchdog is only making an effort to control algorithmic trading. The regulator’s objective appears to be to safeguard the retail investor, notwithstanding the possibility of short-term issues and pressure on certain enterprises to survive. It aims to reduce the possibility of Black Swan occurrences, broker front-running, and mis-selling.
To ensure transparency, equity, and stability in the financial markets, SEBI laws for algorithmic trading in India represent a big step forward. By fostering innovation and technology-driven trading techniques while simultaneously reducing possible hazards related to algorithmic trading, these policies seek to find a balance.
The aim of SEBI is to provide a framework in which market players may take advantage of algorithmic trading while protecting themselves from excessive volatility and market manipulation. This framework will include criteria for registration, risk management controls, testing requirements, and constant monitoring. Additionally, using the appropriate broker and stock investment app to carry out your trades is crucial. You may also look into Share India since it offers real-time data and automation, enabling traders to successfully traverse markets. Successful risk management is essential to success overall.