While sharing his perspectives on the implications of these proposed changes, Tejas Khoday, Co-Founder & CEO at FYERS, said that it is going to be more compliance-oriented, and operationally cumbersome, especially for brokers and traders, because algo trading is all about iterating strategies on the go as well.
Algorithmic trading involves using computer programs to execute trades based on predefined criteria such as price, timing, and volume. Traditionally, it has been the domain of institutional investors, while retail traders relied on manual methods.
Another industry expert Rajesh Baheti, Managing Director at Crosseas Capital Services believes that all this is simply a change of nomenclature with a lot of conditions.
“Currently, a lot of retail algo was being represented as an internet-based trade, and not technically an algo trade. So, you could argue, technically, a lot of this will move into algo trading, and therefore you can say that retail is doing algo,” Baheti said.
This is the verbatim transcript of the interview.
Q: Is this to frame regulations around a new segment which is opening up for retail, or is it to kind of put in guardrails for a lot of the offerings which are already there, because, I suppose it’s the latter? A lot of these offerings are already there for retail investors. For a certain fee, you can get access to these programs. It has been on for years. So just wanted your thoughts.
Baheti: It’s not permission for retail to do algo trading. They were already doing it. It is a guardrail. You are right. What was happening currently was that there were these marketplaces that were displaying algos from independent algo providers. They had connectivity established to maybe 10-15 brokers. So you could choose your algo provider. You could choose your broker. These brokers had given their Application Programming Interfaces (APIs) out to these marketplaces, as well as to anybody who wanted to develop an algo, and then you were connecting to one of these brokers.
But these trades were not getting reflected on the exchange system as an algo trade. They were just simply being reflected as an internet-based trade. So what SEBI has said is that you cannot simply expose your API now and have these people log in and do that automation, and you cannot call this an internet-based trade. Every algo has to be identified as an algo trade, permission has to be taken from the exchange, the algo has to be approved, and the algo providers also simply cannot lend their algos out to the public, just like that. They have to be registered as investment advisors.
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So, it is being made much tougher now for people to simply offer their algos because they have to be registered as investment advisors. And if you make your own algo, you can only do it for your own family, and you can’t simply give it out to other people.
Q: I read a couple of reports which basically said it is kind of to level the playing field. Institutional investors have access, so why should retail but what I am hearing from you is if anything, it will make things tighter in terms of access to these algos. It’s the opposite.
Baheti: Currently a lot of retail algo was being represented as an internet-based trade, and not technically an algo trade. So, you could argue, technically, a lot of this will move into algo trading, and therefore you can say that retail is doing algo. But all this is just simply a change of nomenclature with a lot of conditions.
Q: Your first thoughts on the subject?
Khoday: Rajesh Baheti is on the right track. I feel like it is going to be more compliance-oriented, and operationally cumbersome, especially for brokers and traders, because algo trading is all about iterating strategies on the go as well. It’s not as though you create a strategy and run it all year round. That’s not how it works.
So, there is still no clarity about whether every iteration needs approval, especially if it is a black box strategy. So, it is something to wait and watch for.
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We are going to give our detailed feedback to the regulator about this, but largely, like Rajesh Baheti said, algo traders are already doing what they need to do. Algo trading is already democratised, and we have been at the forefront of providing these services, but from a regulatory standpoint, what they are doing is trying to increase the span of control and making the buck stop with the broker because they are the regulated entities. And I see long-term benefits to this like I always do, and it is ultimately going to help expand the ecosystem, albeit at a gradual pace.
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