Algorithmic trading, or ‘algo’ in market parlance, refers to orders generated at a super-fast speed by the use of advanced mathematical models that involve automated execution of the trade, and it is mostly used by large institutional investors.
Sebi, however, does not put a ban on algorithmic trading. It only bans publishing claims of profits in the past or expected returns in future, based on algorithms and that are offered by entities not regulated by Sebi.
Unregulated platforms are offering algorithmic trading services or strategies to investors for automated execution of trades. Such services and strategies are being marketed with ‘claims’ of high returns on investment, Sebi said in a circular. Further, ‘ratings’ have been assigned to the strategies, which could lead to investors being lured by such claims. This may amount to mis-selling of such services and strategies to investors, it added.
In June, Sebi had warned investors about the proliferation of trading platforms that offered automated trading strategies and cautioned them about dealing with those. “Strategies are being marketed with ‘claims’ of huge return on investment along with ‘ratings’ assigned to trategies and claims that similar returns would be earned in the future,” Sebi had said. “Investors are cautioned that these platforms are unregulated and there is no investor grievance redressal mechanism covering their activities.”
Sebi on Friday also said that if a broker has an association with any such algorithmic trading platform that is claiming such returns and the same is published on the website of the broker, such claims should be removed from the broker’s website within seven days.