SEBI Planning Examination To Become Strategy Provider for Algo Trading?

Moneylife Digital Team 30 January 2024

Investor Interest

Market regulator Securities and Exchange Board of India (SEBI) is reportedly planning to conduct an examination for those who want to become strategy providers for algo trading. The market regulator is also not in favour of allowing brokers to provide an open application programming interface (API) without knowing where it is being used. Algos are offered through brokerage firms, with the APIs providing seamless connectivity between investors using such algos and the broker platform.

During a meeting with algo-writers and other concerned parties, SEBI asked stock brokers to stop using open APIs used without their knowledge immediately. SEBI defines algorithmic trading as any order generated using automated execution logic. And API allows an individual to access brokers' trading platforms without logging in manually. The algo writers usually show a back-tested report on trading strategies to sell the idea that you can make a lot of money on rapid intra-day trading.

The market regulator also reiterated that no one should claim expected returns or absolute terms in algo trading, as such things are not guaranteed. In September 2022, SEBI had asked stockbrokers to refrain from making any reference to the past or expected future return or performance of the algorithm trading.

SEBI has proposed a few models to be used by stock brokers and algo-writers. In one model, stock brokers will take all responsibility, including data safety and security and would obtain a nod from SEBI for the algo trading platform like other platforms. Under another model, both the algo strategy provider and the platform will have to be entities registered with the market regulator.

SEBI is likely to come out with guidelines on algo strategy providers over the next two months for testing and deciding on audits for algo strategies.

As Moneylife pointed out, as retail algos exploded, unscrupulous algo-writers began to lure newly minted investors with the promise of high returns. Many algo platforms falsely promise 'consistent and astronomical' returns. Some have back-testing of strategies that is 'curve-fitted' to mislead investors about returns; there are poor risk disclosures; there is no clarity on whether customer data (shared between brokers and algo-writers) is misused for proprietary trading and front-running a certain strategy deployment. (Read: Who Is against SEBI's Move To Regulate Retail Algos? Are Their Fears Justified?)

Comments

User

d.ambhore

1 year ago

This is really bad news. Already 95% retail traders looses money in intra day trading. Future is AI and not manual trades. No one is placing order on the nse platform Directly. What is the bad that algo trading has done so far. Earlier sebi removed margin to remove retailers from market and this one... Pathetic

shodhsatya

1 year ago

In the garb of protecting retail traders, this is just an attempt to take away the level playing field from retailers. Coz obviously institutions would qualify for using APIs, the hindrances will be created only for retailers. APIs aren't the enemy, they are enablers for retail to trade at scale and speed. That's the real problem. This is an attempt to rig the game.

viplavghosh

1 year ago

Bebi not working for betterment of retail traders bebi working on behalf of institutions and big fii who don't want retail people don't get access of Algo trading