Capital markets regulator Sebi recently cautioned retail investors against dealing with unregulated platforms that offer algorithmic trading. The regulator also warned them against sharing sensitive details with such businesses.
“These platforms are unregulated and thus there is no investor grievance redressal mechanism covering their activities,” Sebi said.
This statement came in the view of a barrage of unregulated platforms offering investors algorithmic trading services or facilities to automate their trades.
It is vital to note that this is not the first time that the markets regulator expressed its aversion to algo trading. Even in December 2021, SEBI released a consultation paper on algo trading to protect retail investors’ interest and prevent market manipulations.
What is algo trading?
Algo trading, or automated trading, is computer-assisted buying and selling of stocks wherein pre-fed computer strategies determine trading decisions based on the set parameters, market patterns and conditions.
The automated trading forayed into India in 2008, however, that time only savvy traders were using it. Lately, retail traders have also started using advanced algos for trading. This method is believed to liberate the traders from continually monitoring stock prices before they initiate an order.
Algo trading became controversial in 2015, when it was revealed that NSE gave preferential access to a few algo traders.
S. Sridharan, founder and principal officer, Wealth Ladder Direct, says that algorithmic trading platforms is a contemporary trend which may or may not work but only those investors should use it who are willing to take a ‘very high’ risk.
“In reality, investors believe that they are willing to take a high risk but they are only inclined to take a positive and not negative risk. So, I believe retail investors should not invest more than 5-10 percent of their portfolio in regulated algo trading platforms,” he said.
He argues that computer algorithms can falter in financial decision-making, and are usually not smart enough to take a wise investment choice.
“During the second wave of COVID, there was an NBFC whose stock surged by 40-50 percent because it bears oxygen in its name. Such completely wrong decisions are generally made by algo platforms,” he added.
There are some tech enthusiasts who believe that such automated trading platforms have the potential to replace human wealth advisors.
On this, Mr Sridharan said, “If algo platforms happen to become smart enough in the future, financial advisors would perhaps start incorporating their advice in their overall recommendation — especially to the clients who are willing to take a high risk.”
“But they can never replace the traditional wealth advisors. Even in the developed markets such as US and Europe, algo platforms have yet not replaced the traditional financial advisors,” he said.
Until that happens, retail investors — as advised by the SEBI — should keep unregulated algo platforms at an arm’s length, and beyond.