MUMBAI: The Securities and Exchange of India’s (SEBI) latest regulatory framework for algorithmic (algo) trading has evoked mixed feeling from the broking community and analysts.
While the regulations are seen as a welcome move, simply because retail investors will be encouraged to take the formal route towards algo trading instead of dabbling in unregistered products pushed by finfluencers, there are concerns over exchanges’ approval process, higher risk involved and lack of education.
Most of the profits made by foreign portfolio investors and proprietary traders last year were via algo-trading. It reportedly makes up 70% of the total volume on the exchanges. For retail investors to get entry into this market is a double-edged sword — they could make big money or lose everything. The comfort, therefore, lies in the fact that it will be properly regulated for even high risk-takers.
For example, Zerodha founder Nithin Kamath said, “If you are a retail trader using broker APIs (application programming interface) to automate trades, you can do so as long as your order frequency is below an exchange-prescribed threshold and this limit is yet to be decided,” he wrote in a blog post recently.
Harsha M, founder of Streak AI Technologies, a platform exclusively for Zerodha users, said that establishing threshold of orders per second will help things not break unlike in the 2020, when algo-trading platforms dominant in the oil market saw back-to-back losses. He also believes that right now since there are no defined returns on market places with algorithms. On the upside, an investor will become more disciplined as intuition and human emotions are not involved.
Currently, the platform is “unalgorithmic” as it only sends notifications to an investor and does not place the orders, but with the new regime, it will be easy to move to the next level of automation from April 1, he said.
Further, Bonanza Capital-backed algo platform Bigul’s founder Atul Parekh believes that while mushrooming of platforms will be controlled, there will be a reduction in the strategies available, given SEBI’s new norms which require the registration of black-box strategies along with research papers backing them. However, Parekh said retail investors should be very careful and there’s a higher risk involved. “Algo is not a product for everyone,” he said.
Sonam Srivastava, founder and fund manager at Wright Research, said the introduction of unique identifiers for algo orders strengthens audit trails, while strict API access control and two-factor authentication improve security. In addition, by categorising algorithms into white-box and black-box structures further protects investors by making execution logic more transparent or requiring additional scrutiny for undisclosed strategies.
The main worry will be the increased compliance burden on brokers, who must monitor API activity and handle algo-related complaints, raises operational costs, as they must register, approve and monitor all algo orders, implement strict API security measures, and ensure traceability through unique identifiers. Also, brokers will have to bear sole responsibility for addressing investor complaints, increasing legal liabilities and customer service costs.
Some like Sankarsh Chanda, founder of a SEBI-registered AI platform, Savart, are strictly against the entry of retail investors in the algo trading, as it will create another way for them to lose money and will lead to reduced trust in the capital market.
Source: The Financial Express
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