Sebi, The Securities and Exchange Board of India, issues a discussion paper to prevent the use of unregulated algorithms of the growing trend of retail algorithms on Thursday. Retail algorithm refers to the practice of retail investors using some computer application or program or an algorithm for exchange criteria. Algorithmic trading, also known as Algo trading, is a method of executing orders by using automated pre-programmed trading instructions. It generates the order and manages the positions and orders swiftly.
Retail investors who use Algo trading and the colocation facility often find themselves at an advantage over the other investors. But the unregulated algorithms have a risk. This risk is being covered under the aforesaid discussion papers. Sebi aims to protect the interests of both, investors and institutions and hence is working on regulating all algorithms and reducing the grey area.
“Stockbroker needs to take the approval of all algos from the exchange. Each Algo strategy, whether used by broker or client, has to be approved by exchange,” Sebi mentioned. “Since there is limited understanding with respect to the nature of services provided by various algo providers, brokers may obtain from their clients, details of nature and type of services taken from algo providers along with a confirmation as to whether the said services are in the nature of investment advisory services,” it further added.