Indian Regulatory Authority SEBI’s new algo Trading Proposal Irks Zerodha and other players
- ByTejika Bajaj | December 13, 2021
Renowned stock broking app Zerodha and other industry players recently expressed concern over the new algo (rithm) trading proposal that aims to tighten the rules pertaining to algorithm trading by retail investors proposed by the regulatory authority SEBI.
The regulator’s proposals to tighten rules on API-fueled algo trades come in the wake of an increase in unregulated third party algo trading service providers, which is feared to be resulting in growing cases of market manipulation. These algos do not have the approval of exchanges but they end up using the broker’s API to execute such trades.
Expressing his dismay over the rules proposed by SEBI, the co-founder of Zerodha, Nitin Kamath said, “There’s no way brokers will be able to validate if an order has come from a client or a third party algo software, which the client has subscribed to. If Sebi wants to clean up this space, algo trading platforms will have to be regulated by getting them to comply with the RIA rules. That will stop practices such as promises of huge returns.”
In stock trading, APIs help establish a connection between automated trading models or algorithms and a broker platform to execute transactions. Earlier, traders used one application to narrow down trading opportunities and executed trades on the broker’s platform separately. These days, savvier traders use APIs facilitated by brokers to connect such trading applications to brokers’ trading platforms that fire orders with minimum human intervention.
While Sebi’s paper said orders emanating from an API should be treated as an algo order and be subject to control by stock brokers, it also proposed that brokers must take approval of all algos from the exchange.
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