Needed, regulation of algorithmic trading

Capital markets regulator Sebi has put out a consultation paper that, rightly, seeks to strengthen regulation and oversight over automated execution logic, also known as algorithmic (or algo) trading, at stock exchanges. Algo trading systems automatically monitor 'live' stock quotes, and initiate buy and sell orders when a given number of criteria are met. And, the extant norms do mandate that all algo orders be routed through broker servers located in India, have a unique identifier provided by the stock exchange, and require the latter put in place risk control mechanisms for such trades.

The paper adds that, increasingly, stockbrokers here provide the application programming interface (API) that makes algo trading possible, to their clients; also, there are now third-party applications seeking to help investors analyse market data in real time and so automate stock trading. And, currently, for all such algo trading for clients, retail investors and others using APIs, there is neither tracking nor oversight. Clearly, prompt remedial measures are warranted. Unregulated and unapproved algos pose summary risks, providing, as they do, scope for systemic market manipulation such as guaranteed higher returns. Hence the move now to tag all orders emanating from APIs with a unique algo ID by the exchange granting approval for the trading. Brokers would need to seek approvals for all and sundry algo trading. Each algo strategy needs to be duly vetted by certified information systems auditors, as per current practice.

In tandem, Sebi needs to step up financial literacy campaigns for investors. Tech does not change the need to appreciate market dynamics and fundamentals. Minus that, pitfalls await those who chase tech for the sake of tech.