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The market regulator may look to regulate algo platforms and make it mandatory for brokers to get approvals for algo strategies used by clients, said two people familiar with the matter.
Some platforms that offer algo software and strategies include Tradetron, AlgoBulls, Algobaba and Robo-matic. Both algo platforms and algo strategy providers may have to register with SEBI, similar to an investment adviser or research analyst. An exam may be mandated for algo strategy providers. The returns claims of such providers may have to be substantiated through a Performance Validation Agency (PVA).
This was discussed in a recent meeting between exchange officials, brokers, algo trading platforms and the regulator.
“The algo trading platforms should be approved by exchanges and regulatory audits should be conducted regularly,” said a broker. The platforms, however, should not be banned as they provide good tools for retail traders to execute their trading strategies more efficiently, he added.
“There are a new class of advisors in market who provide algo strategies to clients to deploy their monies. SEBI should come up with a regulatory framework for such algo strategy providers like it has done for investment advisors and allow strategy providers which are registered by SEBI,” he said.
Open APIs
Brokers have been asked to stop giving access to open APIs if they do not know where it is being used. Currently, there are a number of strategies used by clients using open APIs, which are not tracked by brokers nor approved by exchanges.
“Most of the algo trading happening today is on open API platforms, which is a concern. This allows you to execute a trade without a mobile app or a trading platform. Traders can create algo strategies that are not approved or known to the broker. The concern is that these algos may be wrongly triggered and create a price distortion in the market,” said a broking official.
An open API is a publicly available application programming interface that provides developers with access to a software application or web service.
Algorithmic, or algo trading, refers to executing orders using automated pre-programmed trading instructions.
Last year, the regulator had cautioned investors against dealing with unregulated platforms offering algorithmic trading services and strategies. Brokers were restricted from making any reference to the past or expected future return of algos.
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