ALGO RHYTHM AND BLUES

Can Sebi's draft rules on algorithm-based trading level the playing field between institutional and non-institutional investors?

- SACHIN P MAMPATTA

It started with a profit of ₹2,000 to ₹3,000 for every trading session the first few days. Then came the offer for a lifetime subscription for ₹53,000. And steady losses ever since.

A user posted the case on social media platform Reddit. They were unable to convince a friend that the company selling the algorithmic trading platform was a fraud. What followed was a string of comments from users who had suffered a similar fate. One user had lost ₹40,000 in a fortnight. Another complained of paying ₹60,000 to a provider and then being unable to contact them. A third lost ₹225,000 in a single day.

Algorithmic trading refers to investing through computer programmes which can trade faster and more efficiently than a human being with limited intervention, connecting with broker platforms through an API (Application Programming Interface).

Like any trader, the programme, too, would lose money if the underlying strategy of the trade was incorrect or had lost its edge in a changing market.

Technological challenges abound. But many naive retail investors are sold algorithmic trading software as automatic technological wizardry, which always gives supernormal returns.

The Securities and Exchange Board of India (Sebi) has sought to bring to heel rogue third-party algorithmic trading providers who prey on investor hopes for easy money. The draft set of rules released on December 13 is likely to give clarity for third-party providers who were operating in a regulatory vacuum earlier, encouraging the growth of genuine vendors while cleaning up others, according to experts.

What has also created interest all around is that the new rules allow for retail investors to design their own algorithms though they will have to get it approved before use.

The regulator has reportedly issued notices to multiple brokerages for continuing to associate with the section of algo providers who claimed unrealistic or assured returns.