SEBI’s move to curb the Algo Trading

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The Securities and Exchange Board of India (SEBI), regulator of Indian capital market is moving on to curb the algo trading in stock market, in order to protect the small investor’s interest. A large number of small brokers and investors are in favour of the SEBI’s decision to curb the algo trading in stock market.

Last month SEBI released a discussion paper to obtain the comments from Investors, market infrastructure institution and intermediaries about how much market integrity and fairness affected due to the increased use of algo trading in stock market. Paper shows that more than 80% orders placed through the algo trading and these orders contain only 40% trades on the exchange.

What is Algo trading?

Algorithmic is a predefined set of instructions or steps to be followed by computer.

In algo trading, trader uses pre-defined computer program for placing order, intent to speed up the frequency of trading which is beyond the capability of human trader. Algo traders set the price, timing and quantity. It is also helpful to handle emotions while trading.

For example- a trader set the following instruction

  1. Buy 100 shares of ABC Company, when 50-day moving average goes above the 200-day moving average.
  2. Sell 100 shares of ABC Company, when 50-day moving average goes below the 200-day moving average.

By putting such instructions in the system the order for sell and buy will automatically place when the given criteria and conditions met. Hence, a trader needs not to watch the live market, prices and graph every time.

Benefits of Algo Trading-

  1. You can trade the best possible price.
  2. Accurate trade order can be paced through algo trading system.
  3. Through algo trading system trade executes at the correct time.
  4. It helps in reducing the transaction cost.
  5. It provides you the facility of checking the multiple market conditions, simultaneously.
  6. It helps in avoiding manual error in placing trade orders.
  7. It reduces the possibility of mistakes, which can be occurred due to human psychological and emotional factors.

Despite of all these benefits, the problem with this trading system is that mostly traders in the market are kept out of using this facility, because co-location facilities are not available to everyone. Many small brokers are not aware of the basic terms like algo and frequency trading.

SEBI’s decision of curbing the algo trading might hamper the emotions of big traders, but it is the question of interest of public. It is true that algorithmic trading is not good for small traders. So it is desirable that, in order to protect the public interest algo trading should be restricted or regulated.

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