SEBI has announced new norms on algorithmic (or) Algo trading.
What is Algo trading?
Algorithmic trades are orders executed on the stock exchange platform by computers through a programme designed by the user.
Algo trades can involve different degrees of manual intervention ranging from zero-touch algorithms which does not require much manual intervention.
It was introduced in 2009 in India and there has been rising interest from large domestic and foreign institutional investors.
Algo trade in India accounts for about 35-40 percent of turnover of exchanges.
Algo trades help institutional investors increase the efficiency of trade execution and spot fleeting trading opportunities.
It will also increase liquidity to the market as there are more transactions and investments which gain using this method.
What are the concerns with Algo trading?
Algo trades have often been blamed for magnifying trends and induce flash crashes in the market.
A bug in the programme or error by traders can cause the stock prices to fluctuate wildly and may even collapse the entire market.
What is SEBI’s recent announcement in this regard?
SEBI approves the Algo programmes before they are put into use in any of the Indian exchanges.
By which stock exchanges have to allot a unique identifier to each approved algorithm and ensure that each order is tagged with it.
Recently to check price swings SEBI has announced penalties that would be levied on Algo orders placed more than 0.75 per cent away from the last traded price.
It has also proposed a stricter monitoring of these trades to ensure the smooth functioning of the market.
