The Securities and Exchange Board of India (SEBI) has proposed a significant move to allow retail investors to engage in algorithmic (algo) trading.
What is Algo trading?
Algo trading is a system that utilizes computer algorithms to execute programmed orders on the stock market.
Algo-trading is the use of predefined computer programs to execute trades. A set of instructions or an algorithm is fed into a computer program and it automatically executes the trade when the command is met.
The algorithm can be based on a number of input points like price, timing, quantity or other metrics. When the predefined conditions or inputs are met, orders are placed at a speed and frequency that is impossible for a human trader.
Benefits of Algo trading
Algorithmic trading offers a number of benefits to market participants. For starters, it has made trading systematic and error-free. Human errors like giving wrong inputs have been completely eliminated by algo-trading.
Algo trading is known for its ability to enhance efficiency in market transactions, offering benefits such as faster and more precise order execution.
India and Algo trading
For a long time, these advantages were primarily accessible to institutional investors through the Direct Market Access (DMA) facility.
SEBI’s new proposal aims to widen this access, allowing retail investors to use algorithms in their trades, albeit with comprehensive safeguards in place.
The initiative is part of SEBI’s ongoing effort to enhance market efficiency and transparency.
The proposed provisions are designed to bridge the gap for retail traders who have shown growing interest in adopting algorithmic strategies, giving them the tools to compete more effectively in the fast-paced world of stock trading.
While algo trading brings increased efficiency, it also presents potential risks, including market manipulation and volatility. To address these challenges, SEBI has stressed the need for better surveillance, risk management, and investor protection mechanisms.
Since 2012, SEBI has been working to refine and enforce regulations around algorithmic trading, constantly adapting to the evolving landscape.
The move is expected to facilitate a safe and fair introduction of algo trading to retail investors, with added measures to prevent misuse and ensure proper checks and balances.
The two main types of algorithmic trading involve algorithms with disclosed and replicable logic and algorithms with undisclosed or non-replicable logic.
