Hi, I am Gunjan Grover.
Today I am going to talk about Algo Trading Platforms.
Nowadays, Algo-trading platforms are popular and their use is increasing in India.
SEBI is also bringing many regulations.
Today we will tell you that what Algo-trading is and what are the updates from SEBI.
Don’t worry. It won’t be very technical.
I will explain everything in such a simple way.
Let’s start with the basics of Algorithmic trading.
Algorithmic trading is a process to execute orders utilizing automated & pre-programmed trading instructions by using price, timing, and volume.
What is an Algorithm?
An algorithm is a set of directions for solving a problem.
Computer algorithms send small portions of the full order to the market over time.
Let us understand this with a simple example.
Say you want to buy 1000 stock of ITC when it goes above INR 200.
And after Rs.200, with every point increase, you will buy 10 shares.
Or, with every point decrease, you will sell 10 shares.
If you do not have a program or an algo, you have to manually keep checking whether the price has been breached or not.
However, if you have programmable software, it will do that work for you.
A strategy can be coded and then it can monitor live market data and generate alerts whenever a buy or sell signal is there.
Fully automated algos even automate the order placement completely.
Algo trading came to India in 2008, but only a few people were using it.
Retail traders have started using advanced algos for trading mainly in the past five years.
There are two ways of algo trading followed-
By using off-the-shelf products available to automate broker trading platforms, commonly called “bridges”.
These are third-party automation tools that plug into broker trading platforms to place orders automatically on a broker’s trading application.
This is generally using automation tools to automate software running on a customer’s computer screen.
By using APIs (Application Programming Interface) offered by the brokers.
Now let's talk about Discretionary Algos offered by Brokers to Customers.
If a broker offers a discretionary algo to a client, it needs to obtain exchange approvals.
By discretionary algos we mean algos that decide when to buy or sell based on a strategy.
These algos run on the broker’s system and not on the customers.
Due to strict due diligence from SEBI, brokers cannot offer this algos to retail customers.
They can only offer it to their customers who have dealer terminals with the necessary approvals.
Now let's talk about Algos created by customers using APIs provided by brokers.
Many online brokers provide APIs to their clients.
Tech-savvy clients can build their Algos and use them for their trades using the APIs.
While this is a practice followed by the western stock markets for many decades, it has been a recent trend in the Indian market.
As of now a very small percentage of total trading volume gets generated through this medium.
However, one can expect this to rise rapidly soon.
The rise in unregulated third-party Algo Platforms.
The stock market has been a place where many unregulated players do a lot of mis-selling at the expense of gullible retail investors.
One such rampant mis-selling is done by unregulated third-party Algo platforms.
Due to a lack of regulation, these platforms hide the real data and strategies
Often trap retail investors with tall and false claims of high-profit strategies.
What has SEBI decided to do about this?
SEBI released a Consultation Paper on Algorithmic Trading by Retail Investors dated 9th December 2021.
In the paper, they have highlighted the concerns over the rise in these unregulated algo platforms.
The proposal of SEBI points at far more responsibilities ahead for the brokers.
The paper makes the following point- “Stockbroker is responsible for all algos emanating from its APIs and redressal of any investor disputes.
Obligations of stockbroker, investor, and third party algo provider/vendor need to be separately defined.
Stockbroker is responsible for assessing the suitability of investors prior to offering algo facility.
No recognition shall be given by the Exchange to the third-party go provider/vendor creating the algo.
Stockbrokers shall ensure that only those third-party algo provider/vendor, with whom broker had entered into an agreement with,
shall use the name of the broker as part of their testimonial, provided Exchange prescribed advertisement guidelines are met.”
SEBI does the right thing by expressing concerns over unregulated third-party algo platforms.
However, we are way behind the advanced market in terms of API-led algo trading.
A proposal like this may slow down us further on this journey.
The regulation ensures that retail investors are protected and it ensures their suitability as well.
The regulation will increase the confidence of retail investors who wish to undertake Algo trading.
Let’s see how the story pans out.
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All of these videos are for educational purposes and are not a buy or sell recommendation.
On that note, here's me Gunjan Grover. Signing off.
Bye-bye. Take care. Keep calm and Invest on.