Stick to ethics in algorithm trading: FinMin to traders, exchanges

Algo trading refers to orders on bourses generated using high-frequency, automated execution logic

The finance ministry on Monday asked exchanges and market participants to stick to ethics in algorithm (algo) trade and said policies need to be developed to control risky and non-competitive trades.

Economic Affairs Secretary Subhash Chandra Garg said the Securities and Exchange Board of India (Sebi) will have to devise policies for non-discriminatory, fair and equitable access to all market participants.

Speaking at a seminar on algo and high-frequency trading organised by the Department of Economic Affairs (DEA) and the National Institute for Financial Management (NIFM), Garg told exchanges and market participants that there was nothing wrong in maximising profit in stock markets by developing a better algorithm. “But the same ability to write algorithms can be used to create disruption in market, create inequities, non-competitive behaviour or even create such risks that market itself collapses,” he said.

Garg said the aspect of algo trading, where one can risk the market, or can create a non-competitive environment, or can use means to create unfair advantage over others, needs to be looked at. “This is the aspect which from policy or regulatory perspective we cannot allow. That’s where policy makers and regulators need to have the ability to control and regulate or stop this kind of (practice by) institutional players,” Garg said.

Algo trading refers to orders on bourses that are generated using high-frequency, automated execution logic. Institutional investors use algorithms in trading, leaving retail investors at a disadvantage.

Finance Secretary Ashok Lavasa said in times of digitalisation, policymakers will have to ensure that stock market manipulation or flash crashes are dealt with appropriately.

“I want to reintroduce the ethical element which will remain important whatever sophisticated technology you bring in. While human beings have great capacity to work on complex technology, at the same time technology has an inherent ability to dull the human mind. Therefore we need to guard against that possibility,” Lavasa said.

Algo trades gives “unequal access” to institutional investors over their retail counterparts, as they have access to speed and co-location, Garg said.

“The policy question that needs to be explored is whether we can actually provide non-discriminatory, fair and equal access to these two broad category... I have a feeling that possibly we can’t provide equal and non-discriminatory access,” he said.