Need To Regulate Algorithm Trading Questioned

Securities and Exchange Board of India

There has been heated debate on algorithm based trades. Amidst this debate, Rakesh Jhunjhunwala, an ace investor, has backed this kind of trading and has even raised questions on the need to regulate this form of trading.

Rakesh Jhunjhunwala even told reporters that he does not agree that there should be regulations for algorithm (algo) based trading. He also said that regulation of algo trading and norms to do the same should be brought in only in case of enough evidence of manipulation in the market. Rakesh Jhunjhunwala also said that any method of trading can be used by an investor. The method can be technical also but that does not mean that it is an incorrect method. He vehemently said that just because someone is doing algo trading, that investor should not be regulated and that regulations should not be there unless there is strong and solid evidence that the trading is being done to manipulate the stock market prices.

Meanwhile, a new set of norms for algorithm trading are being worked out by markets regulator- Securities and Exchange Board of India (SEBI). SEBI is looking at multiple optionsto regulate high-frequency or algorithmic trading in the stock market. Very simply put, algorithm trading refers to those orders on the stock markets that are generated by using high-frequency and logic of automated execution. Algo trades are programmed by computer algorithms and are capable of executing thousands of orders in a second. Though they provide a lot of liquidity and thus are justified in the market, they can wreak havoc in the markets by greatly distorting the prices away from the fundamental value of securities. Orders can be entered with no intent of executing them thus creating an illusion of demand for achieving favorable prices. Globally, algo traders have been brought to book for this.

The above statements were made by Mr. Jhunjhunwala at the launch of an investment and trading platform called Selfie. This platform was launched by Geojit BNP Paribas – a stock brokerage. This trading platform is focused towards catering to especially young tech savvy individuals and is aimed at giving the users a full and absolute control over their trading with the help of timely research inputs.

In the past, market experts have attributed certain instances of abnormal market movements to algo trading.

Regulators all around the world have been forced to take a closer look at the loopholes and gaps in the current existing regulations for algo trading and are also exploring ways of making these regulations stronger. This has been due to the increasing volume of algorithm trading and all risks associated with it.

The Reserve Bank of India has also issued a report warning against the ever increasing popularity of this superfast algorithm trading. The Reserve Bank also said that the ultra low latency and complex coding because of algo trading’s advanced communication platforms greatly increase the risks of manipulations in the stock markets as well as of erroneous trades. please follow us at https://twitter.com/financetradingn

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2 thoughts on “Need To Regulate Algorithm Trading Questioned

  1. Bruce Owen

    The trading platform, which would give users absolute control over their trading with timely research inputs, aims to cater to tech savvy individuals, especially the youngsters…

    Like

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