Note4Students
From UPSC perspective, the following things are important :
Prelims level: Algo Trading
Why in the News?
Initially exclusive to institutional investors, Securities and Exchange Board of India (SEBI) now has proposed to allow retail participation in Algorithmic trading (algo trading) to ensure market stability and allow retail participation.
What is Algo Trading?
- Algo Trading, or Algorithmic Trading, is the process of using computer programs and pre-defined rules to execute financial market trades at high speed and efficiency.
- It eliminates human intervention and emotions, allowing trades based on mathematical models, historical data, and market conditions.
- How Does Algo Trading Work?
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- It follows pre-coded algorithms to identify trading opportunities and execute orders.
- It uses technical indicators, price movements, volume, and other data to determine trade entry and exit points.
- The system can scan multiple markets simultaneously and execute trades in milliseconds.
- High-Frequency Trading (HFT) is a subset of algo trading that involves executing thousands of trades per second.
- It reduces market impact, transaction costs, and slippage compared to manual trading.
Key Highlights of Regulatory Framework:
- Broker Responsibility: Only registered brokers can offer algo trading services to retail investors. Direct retail algo trading without broker approval is not permitted.
- Market Surveillance: Exchanges must monitor algorithmic trades to prevent market manipulation and excessive order placement.
- Latency and Co-location Rules: SEBI has set rules to ensure fair access to low-latency trading infrastructure and avoid unfair advantages.
- Risk Management: Traders must maintain adequate margins, and there are circuit breakers to prevent excessive market volatility.
- Pre-Approval for Strategies: Algo trading strategies must be tested and approved before deployment to minimize market disruption.
- Algo vs. Non-Algo Identification: SEBI mandates separate tagging of algo trades for better transparency and oversight.
- Ban on Self-Trading: Algorithms must not execute self-trades to manipulate market prices.
PYQ:[2019] Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? (a) Certificate of Deposit (b) Commercial Paper (c) Promissory Note (d) Participatory Note |
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