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Businesses cannot be run on 'black box' model: Sebi chief on algo trading

The warnings from the markets regulator come amid reports that it may clamp down on algo trading, which in the past has been misused by certain brokers with the connivance of top NSE officials.

Topics
algorithmic trading | Business models | Madhabi Puri Buch

Press Trust of India  |  Mumbai 

Madhabi Puri Buch
Sebi chairperson Madhabi Puri Buch

Sebi chairperson on Wednesday said any business on the 'black box' model that cannot be audited or validated will not be permitted.

She also said since data is a public infrastructure, any attempt by any private party to own them cannot be tolerated.

"We are not for or against algo trading as long as there is sufficient transparency and disclosures. cannot rely on a black box which is not open to sunlight.. therefore any claim that cannot be audited and validated cannot be permitted," Buch said addressing the Global Fintech Fest here this morning.

The warnings from the regulator come amid reports that it may clamp down on algo trading, which in the past has been misused by certain brokers with the connivance of top NSE officials.

Earlier this month, Sebi had issued new guidelines for stock brokers providing services after it was found that certain stock brokers provide facilities to investors through unregulated platforms.

On September 2, it said the new guidelines are aimed at preventing instances of mis-selling. Unregulated platforms are offering services or strategies to investors for automated execution of trades. Such services and strategies are being marketed with "claims" of high returns on investment," Sebi said in a circular.

Further, "ratings" have been assigned to the strategies, which can lead to investors being lured by such claims. This may amount to mis-selling of such services and strategies to investors, it added.

Accordingly, Sebi has given certain responsibilities to brokers who provide algorithmic trading facilities to investors through such platforms. Such stock brokers have been restricted from making any reference to the past or expected future return of the algorithm as well as associating with any platform that provides any reference to the past or expected future return of the algorithm, Sebi said.

Existing regulations don't allow brokers to offer algo facility to their retail clients. In June, Sebi had cautioned investors against dealing with such unregulated platforms offering algorithmic trading services and strategies trading which was first introduced in the 1970s in the US.

Algorithmic trading or 'algo' in market parlance refers to orders generated at a super-fast speed by the use of advanced mathematical models that involve automated execution of the trade, and it is mostly used by large institutional investors.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Wed, September 21 2022. 16:40 IST
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