SEBI Proposes Rules for Retail Algo Trading

• 14 Dec 2021

On 9^th December, 2021, Capital markets regulator Securities and Exchange Board of India (SEBI) proposed a regulatory framework for algorithmic trading (algo trading) by retail investors to make such trading safe and prevent market manipulations.

Need

• At present, though the broker can identify the orders emanating from an Application Programming Interface (API), they are unable to differentiate between an algo and non-algo order emanating from an API.
• This kind of unregulated algos pose a risk to the market and can be mis-used for systematic market manipulation as well as to lure the retail investors by guaranteeing them higher returns.

Image Source: Business Standard

About Algorithmic Trading (Algo Trading)

• In market parlance, algo trading refers to any order that is generated using automated execution logic.
• The algo trading system automatically monitors the live stock prices and initiates an order when the given criteria are met.
• It is also known as automated or programmed trading since pre-programmed computer strategies execute buy and sell trades depending on set parameters, instructions or market pattern and conditions.

Benefits of Algorithmic Trading

• Trades are executed at the best possible prices.
• Trade order placement is instant and accurate (there is a high chance of execution at the desired levels).
• Trades are timed correctly and instantly to avoid significant price changes.
• Reduced transaction costs.
• Simultaneous automated checks on multiple market conditions.
• Reduced risk of manual errors when placing trades.
• Reduced the possibility of mistakes by human traders based on emotional and psychological factors.