The Securities and Exchange Board of India (SEBI) announced on December 9 2021 that stock trading done via application programming interfaces (API) will be termed algo trading. This raised serious concern among the private broker firms regarding hindering the growth of algo trading in the country.
What is Algo trading?
We know that there was a boom in stock trading in the last few years. It grew specifically during the pandemic when a majority of the interested population realized the importance of a passive income channel.
With the advancement in technology and applications, we have witnessed the introduction of automation in personal and professional spheres. In this aspect, stock traders, especially retail investors, face a lot of hindrances while watching the market trends and investing in stocks accordingly. This is where algorithmic trading comes into the picture.
Algorithmic trading, also known as black-box trading, automated trading and algo trading, is a computer program that allows retail traders to set parameters regarding stock brought. This software platform offers an excellent set of instructions a user can define and set a parameter regarding all the stocks he owns. It means he will not have to watch the market constantly anymore but can trade easily.
You can install and use this software platform on smartphones. It is a genre of application that allows users to make automated decisions based on the parameters set. You can set or change the instructions manual and the trading will do accordingly. This API-based trading platform also allows creating an instant demat account without any hassle.
The entry of automation into the trading universe literally simplified the problem. Retail traders can now concentrate on their daily lives and can still make exceptional decisions. In fact, there is no way a human trader can manually make faster decisions. The profit generated on trading is instant as the AI-powered platform follows instructions strictly and promptly.
The proposal from SEBI that worries trading firms
On December 9 2021, SEBI proposed the creation of a regulatory framework related to algo trading. The regulatory authority dictated that all the orders generated from an API platform will considered algo orders.
These orders will be subject to carry a unique ID for algo trading. This ID will be provided by the stock exchange after granting permission for trading. Stockbroker firms will be subject to seek permission from the respective stock exchange.
No matter who uses the algo trading, a retail investor or a broker, it will be subjected to seek permission. As per the latest guidelines from SEBI, the algo strategy will also need a certification issued by the Certified Information System Auditor (CISA) or the Diploma in Information System Audit (DISA).
The introduction of automated trading interfaces has considerably increased the benefits for retail traders. Previously, it was thought that retail investors cannot influence the stock market. The global online trading market is rapidly increasing with a CAGR of 7.62% and is estimated to reach US$ 30,813.84 Million by the end of 2028. This trend is rapidly catching up in the Indian subcontinent.
As per SEBI, the broker firms are in control of the client orders, margin information, and order confirmations. These algorithms run on the servers of the broker firms providing services to retail investors. SEBI directs to build a two-factor authentication feature in such systems that will provide access to investors for algo/API trade.
Concerns of broker firms and fintech companies
The automated API trading platforms have taught every novice and avid trader how to create demat account online and start trading instantly. The APIs are 3rd party applications that act as virtual assistants enabling the users to make split-second decisions.
An API offers a set of instructions that can improvise based on the consideration of a user. Hence, the API uses an advanced AI-powered logical decision-making process to execute stock trading on behalf of the user. Thus, the users can generate profit faster according to the parameters set.
After the SEBI’s intervention, every algorithm platform will need approval. It was introduced to control the generation of algo-based trading decisions. It is hard to recognize whether the trade is done manually or automatically. Broker firms can misuse this algo-power to manipulate the market systematically and lure in more retail investors showing a guaranteed return.
Hence, SEBI wants to regulate the market and want to identify the trades done through approved algo-based platforms. On the other hand, market experts suggest will boost the trading behavior of retail investors. Such restriction might hamper the usage of an API system by registered brokers. These API-generated trading systems reduced the hassle to take permission from every retail investor and promoted quick decisions.
Others say that this step will keep the market unbiased and stable. It will eventually protect the best interest of retail investors. If you are planning to invest in share market, you need to gain some basic knowledge about online trading.
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