SEBI Irks Zerodha’s Algo Bargaining Proposal and Other Industry Players

All orders from an API should be treated as an algo order and be subject to the control of a stockbroker, suggests capital markets regulator SEBI.

Using API and algo-commerce in the same statement is not good for India’s capital markets which must be forward-looking in a tech-driven world, say industry players ‘industry

SEBI has published a consultation document in this regard and is seeking comments and reactions from stakeholders no later than January 15, 2021.

After allowing algo (rithmic) trading in 2008 by non-traders, the Indian capital markets regulator Securities and Exchange Board of India has now proposed a regulatory framework for algo trading performed by retail investors.

An algo trading system automatically initiates an order based on defined livestock price criteria.

“For example, suppose you have a simple strategy to buy a stock if the stock price exceeds its 20-day moving average and sell if it drops below the moving average. If you are not using a program, you will have to manually view the charts to determine the P&L of that strategy in the past, then follow the charts for buy and sell signals. Doing this manually is difficult and almost impossible to scale, as it is impossible to manually track beyond a few graphs, ”says Zerodha co-founder and CEO Nithin Kamath in his Blog.

SEBI has released a consultation paper and is seeking comments and feedback from stakeholders by January 15, 2021. However, the very definition of algo-trading has upset several retail brokerage firms and their founders, including Kamath. by Zerodha.

Currently, dozens of fintech startups such as Zerodha, Paytm Money, Upstox, Kuvera, Fyers and many more are offering retail services and essential technologies in this regard. While Zerodha claims to be the largest platform with over seven million users, Upstox has over five million and Kuvera has over one million.

Operating with little or no brokerage fees, many of these platforms have grown in popularity in the form of small first-time retail investors and nervousness whether an increase in compliance costs can result in the loss of these users. .

What are SEBI’s concerns

Currently, the exchanges approve the algo submitted by brokers. However, for algos deployed by retail investors using APIs, neither exchanges nor brokers can identify whether the particular trade emanating from the API link is algo or non-algo trade, SEBI explains.

SEBI further expressed concerns about these unregulated / unapproved algorithms which pose a risk to the market and could be misused for systematic market manipulation and to attract retail investors by guaranteeing them higher returns.

As a result, the regulator proposed that all orders from an API be treated as algo orders and be subject to the control of a stockbroker and APIs to be executed. Algo trading should be tagged with the unique algo identifier provided by the exchange, granting approval for the algo, the regulator said.

Does every Algo have to be approved first?

This will increase the compliance cost for brokerage platforms and, as a result, they could lose a significant number of retail investors, believe many stakeholders. It also caused confusion among the founders.

Nitish Narang, Founder of Delhi-based Intraday and Time-Based Backtesting Platform Stockmock tweeted:

“Can someone help me figure this out please.” must each algo first be approved by sebi, via a broker? example: 920 straddle with 20% sl and 25% sl are different strategies and both require separate approval? is this what they are planning? or I misunderstood.

Not all orders from an API can qualify as Algo Trading ‘

“Zerodha (Kite Connect) and many other online brokers allow clients programmatic API access to their own accounts… Since APIs are primarily for computer programmers, unsurprisingly less than 0.05% of our clients use APIs, and an even smaller fraction use them. to place orders, ”said Nithin Kamath.

In its article, SEBI put the burden of algo trading on brokerage platforms.

Kamath, in his blog, points out that it is impossible to determine whether an order from a customer was placed by him, someone on his behalf, or by a program running on his computer. Currently, regulations do not recognize algorithms that run on customer computers. Even if there were regulations, it is impossible to regulate or enforce what customers are performing on their computers or if a human or program clicks buy or sell buttons on a trading platform on a client’s computer.

Delineate automated policies for consent-based workflows

In a tech-driven world where everything is run on APIs, including the broker’s trading application is powered by an authenticated REST API, the paper (SEBI) should have distinguished between automated algo-powered strategies. through APIs and login / consent-based workflows created to execute transactions by customers themselves, said Ujjwal Jain, Founder and CEO of WealthDesk.

Using API and algo-trade in the same statement is not good for Indian capital markets which must be forward looking in a tech driven world.

Jain further clarified that algo policies created by unlicensed self-proclaimed entities and individuals and distributed through any platform with guaranteed returns should be ruled by regulations and subject to RIA / RA regulations or whatever. is considered appropriate. The regulations should work around this problem. This will also ensure that automated transactions are also limited when distributed over the internet.

A proposal is not a ban

Clarifying the buzz that SEBI may ban algo trading for retail investors, Pravin Jadhav, Founder and CEO of Raise Finance, said, “Algo trading is the future, just like API based trading. If you think or your stockbroker says that SEBI will ban it, that is wrong or misleading. Regulators in India are more aligned with innovations and technology than anywhere else in the world. “

SEBI wants the exchanges to know which orders are coming from where and how; as a regulator, this is a very fair request. If you’re worried because you’re doing something wrong, then you shouldn’t be doing it in the first place, Jadhav added.

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