The recent SEBI Consultation paper regarding regulating Algo trading is surprising and confusing to say the least. (The effect is almost equal to banning algo trading by retailers)
I was going through the paper and I found some of the points very amusing :
All orders emanating from an API should be treated as an algo order and be subject to control by stock broker and the APIs to carry out Algo trading should be tagged with the unique algo ID provided by the Stock Exchange granting approval for the algo.
Stock broker is responsible for all algos emanating from its APIs and redressal of any investor disputes
Stock Exchanges have to develop a system to ensure that only those algos which are approved by the Exchange and having unique algo ID provided by the Exchange are being deployed. Brokers shall also deploy suitable technological tools to ensure that appropriate checks are in place to prevent unauthorized altering/tweaking of algos.
Stock brokers shall include a specific report on algorithm checks implemented by them as a part of annual system audit report submitted to the Exchanges and format for the same shall be prescribed by the Exchanges.
Some of the basic and simple observations and conclusions that we (as outsiders) can derive from some of these proposals is :
1. This proposal throws the complete onus on brokers and basically discourages brokers to provide APIs to retailers. The reason is simple : the rules and regulations make it exceedingly tough and complex for the brokers and they would eventually stop providing these services as the risk is too huge and it just doesn’t make any sense to continue this anymore.
2. The issue was about regulating misleading advertising about guaranteed returns but this proposal is talking more about what the brokers should do instead of talking about various solutions like bringing algo trading platforms under RIA/RA framework.
3. The funny thing with a poorly planned and executed regulation has often been that it often leads to new ways of gaming the system.
4. In short, SEBI has to find innovating ways to stop these guarantee high return scammy algo platforms and create an ecosystem which encourages tech innovation amongst the tech-savy investors.
I would request techie traders and those traders who use APIs to share their views on this topic and explain the issues with this paper in detail and also suggest some innovative solutions to this ever growing issue of scammer who talk about guaranteed returns using algorithmic trading.