The future of algo trading

AST MONTH, THE Securities and Exchange Board of India (Sebi) proposed significant changes to its framework governing algo trading.

- SANDEEP PAREKH

To recap quickly, algorithmic trading, or algo trading, refers to any trading activity that automates trades, and does not require manual intervention to place any orders, or monitor prices.

There are two ways in which one can carry out algo trading. The straightforward method is to use the algorithms provided by the stock broker. The other route is through application programme interface (API), which enable electronic systems to connect with each other. Think of it as a data pipe which carries your algorithm. APIs enable the transmission of information, and as a result, a third party can create a code that will execute itself on the broker's platform.

In the context of algo trading, third parties provide their algo on, say, platform X, which is connected to the broker's platform through an API. Thus, orders placed by the client on platform X get passed on to the broker. Now, while a broker can identify that an order is coming in through an API, it cannot verify that the order is an algo order.

In 2021, concerned with the rise of unregulated algos, Sebi proposed to treat all API orders as algo orders. This was a flawed departure from its mission to encourage innovative and digital solutions in the securities market, as the regulator's proposal would have saddled connectivity between brokers and other sophisticated players linked to them for non-algo purposes. It appears that the proposal has been scrapped, and after extensive consultations with the industry, a more practical approach has been proposed.

With respect to API orders, Sebi has suggested that an order per second (OPS) threshold be specified, and that all API orders above such threshold would be treated as algo orders.