Will Sebi frown on algo apps for retail investors?

Given the track record of the regulator in keeping retail investors away from risky products, it will do well to monitor the use of such apps by retail investors


Sebi has, in the past, raised a red flag over the growing use of algos and has even sought the views of stock exchanges as part of the review process. Photo: Abhijit Bhatlekar/Mint
Sebi has, in the past, raised a red flag over the growing use of algos and has even sought the views of stock exchanges as part of the review process. Photo: Abhijit Bhatlekar/Mint

Mumbai: Even as capital market regulators are grappling with ways to ensure safety in new techniques like algorithmic trading, Indian brokerages appear to have no hesitation in pitching the product to their clients, including retail clients.

Algorithmic trading or algos in market parlance refers to the use of software codes to automate and enhance order-matching processes.

Business Standard reported on Friday that leading domestic brokerages such as Motilal Oswal Financial Services Ltd, Kotak Securities Ltd, IIFL Holdings Ltd and Edelweiss Financial Services Ltd have all started providing apps to their retail clients who use algos to provide trading or investment suggestions.

Some of the new-age brokerages that rely heavily on the use of technology also provide apps to retail investors wherein the clients can back-test their trading strategy to check how their bets would have performed in the market.

The question is: will the Securities and Exchange Board of India (Sebi), the stock market regulator, be comfortable with brokerages pushing such products to retail investors?

Sebi has, in the past, raised a red flag over the growing use of algos and has even sought the views of stock exchanges as part of the review process. The Reserve Bank of India (RBI) has also reiterated its concerns around algo trading in a recent financial stability report.

Given the track record of the Indian capital market watchdog in keeping retail investors away from risky products, it will do well to monitor the use of such apps by retail investors.

The regulator’s better-safe-than-sorry approach towards retail investors was recently on display when it raised the minimum size of derivative contracts. This was the first time in nearly 15 years that the minimum contract size was increased. The decision came against the backdrop of evidence that retail investors were getting more active in the high-risk derivative segment.

The use of algo in the Indian market is already under review by the capital market regulator and its growing use among retail investors may prompt the watchdog to accelerate the process. It has sought the views of the exchanges on whether the speed of algos can be slowed to encourage fairness, transparency and equal access to all categories of investors.

BSE, which is Asia’s oldest stock exchange, is also of the view that there is room for “further strengthening” of the overall framework for algo trading to reduce the concerns raised by a section of market participants.

But this is easier said than done. Regulators across the globe are grappling with this issue and India is no exception.

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