Capital markets regulator SEBI today ruled out a ban on algorithmic trading products, even though it said it is “worried” by the rapid adoption of these tools and called for appropriate risk management systems to be put in place by market players using them.
SEBI is not looking at banning these products, the Chairman, Mr U.K. Sinha, told reporters on the sidelines of a CII meet on capital markets here, though he added, “But we are worried.”
The market regulator is slated to conduct a review of its risk management system in the near future and a ban on algorithmic trading products was apprehended by certain quarters following a technical glitch that resulted in the cancellation of all derivatives deals on the BSE during Muhurat trade on Diwali (October 26).
SEBI had said it would do a thorough review of the risk management system in algorithmic trading to prevent a repetition of such incidents. In this regard, Mr Sinha clarified that stakeholders’ views will be taken on board.
“We will consult all the stakeholders before taking a decision. Though SEBI is yet to come up with a risk management system for these products, we want all the players to have their own risk management systems in place,” Mr Sinha said.
Algorithmic trading systems, or high frequency trading systems, use highly advanced mathematical models to make transaction decisions.
This highly quantitative trading model employs computerised algorithms to analyse incoming market data and implement proprietary trading strategies wherein large quantities of shares are purchased by dividing them into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.
Use of these products has been gone up significantly in domestic markets in the last three years.