{"id":153502,"date":"2021-12-15T20:10:25","date_gmt":"2021-12-15T14:40:25","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=153502"},"modified":"2021-12-15T20:10:25","modified_gmt":"2021-12-15T14:40:25","slug":"on-algorithmic-trading-algos-regulate-dont-stifle","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/on-algorithmic-trading-algos-regulate-dont-stifle\/","title":{"rendered":"On Algorithmic trading\/Algos: Regulate, don’t stifle"},"content":{"rendered":"\n

News<\/strong>: In a consultation paper last week, the Securities and Exchange Board of India (SEBI) proposed regulating retail or third-party algorithmic trading (algos).<\/p>\n

What is algorithmic trading\/Algos?<\/strong><\/h5>\n

Algos are programmes that automatically monitor price-volume action and make trades without human intervention<\/strong>, buying and selling when pre-set instructions are triggered by price moves.<\/p>\n

By the National Stock Exchange\u2019s estimate, about 14% of the trading volume (and around 45 per cent of the trading value) is algo-driven.<\/p>\n

What are the risks involved in<\/strong> algorithmic trading\/ Algos?<\/strong><\/h5>\n

Algos can place the user at greater risk<\/strong>. This is partly due to the lack of human intervention, and partly because they can be programmed to make simultaneous trades of different markets. It could spiral into a huge market-wide risk<\/strong> owing to lack of circuit filters.<\/p>\n

The famous \u201cBlack Monday\u201d crash of Wall Street on October 19, 1987, occurred because algos sold heavily without human intervention.<\/p>\n

Why SEBI wants to regulate retail or third-party algorithmic trading?<\/strong><\/h5>\n

Firstly,<\/strong><\/em> the regulator believes these modes of trading are risky and there is little understanding of how they function.<\/p>\n

Secondly,<\/strong> <\/em>it can be misused for systematic market manipulation as well as to lure the retail investors by guaranteeing them higher returns<\/p>\n

Thirdly,<\/strong><\/em> the potential loss from a failed algo strategy may be huge.<\/p>\n

What are the proposed regulatory changes?<\/strong><\/h5>\n

–<\/strong> SEBI has proposed to treat all orders based on the Application Programming Interface (API) as algo-driven<\/strong>. Further, such orders should be tagged with an ID unique<\/strong> to the brokerage.<\/p>\n

–<\/strong> Brokers should perform a sequence of stringent checks on any API-based trades<\/strong> to ascertain if these are algos.<\/p>\n

–<\/strong> It has also stated 3rd-party algo providers could be treated as investment advisors<\/strong> and that two-factor authentication (which implies human intervention)<\/em> be put in place.<\/p>\n

What are the issues in the proposed regulatory changes?<\/strong><\/h5>\n

– It would impact retail traders and brokerages<\/strong> in terms of the cost of compliance. <\/strong><\/p>\n

– <\/strong>It would retard the use of API-based technology,<\/strong> which smoothens trading processes for all investors.<\/strong><\/p>\n

–<\/strong> SEBI already has many robust checks in place to ensure adequate margins are collected. It has circuit filters<\/strong> to halt trading if there is an extreme price move.<\/strong><\/p>\n\n\n\n
Note<\/strong>: Circuit filters are price bands imposed by the SEBI to restrict the movement of stock prices (up or down), of listed securities. When the stock price breaches a stipulated price band as decided by stock exchanges, trading in that particular stock is suspended.<\/em><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
What is the way forward?<\/strong><\/h5>\n

Major retail brokerages estimate around one in 2,000 clients uses algos. This can be tackled by adequate margining<\/strong>.<\/p>\n

Imposing high costs of compliance under the assumption that every API user is an algo trader would punish every investor.<\/strong><\/p>\n

Source:<\/strong> This post is based on the article \u201cRegulate, don’t stifle<\/strong>\u201d published in Business Standard<\/strong> on 15th<\/sup> Dec<\/strong> 2021<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

News: In a consultation paper last week, the Securities and Exchange Board of India (SEBI) proposed regulating retail or third-party algorithmic trading (algos). What is algorithmic trading\/Algos? Algos are programmes that automatically monitor price-volume action and make trades without human intervention, buying and selling when pre-set instructions are triggered by price moves. By the National… Continue reading On Algorithmic trading\/Algos: Regulate, don’t stifle<\/span><\/a><\/p>\n","protected":false},"author":10316,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[10503,216],"class_list":["post-153502","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-business-standard","tag-gs-paper-3","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704864617},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/153502","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=153502"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/153502\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=153502"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=153502"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=153502"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}