By Hemant Sood

The Indian stock market is undergoing significant transformation with the increasing adoption of algorithmic and automated trading. This technological evolution demands a corresponding shift in regulatory frameworks to maintain market integrity, fairness, and stability.

Rise of Algorithmic and Automated Trading

Algorithmic trading, including high-frequency trading (HFT), has become a significant part of the Indian market. HFT, in particular, uses strategies like market making, momentum trading, and statistical arbitrage to capitalize on short-term market movements. While these technologies enhance market efficiency and liquidity, they also pose challenges such as potential market manipulation and a possible unfair advantage to large institutions over smaller investors.

SEBI’s Regulatory Response

In response to these challenges, the Securities and Exchange Board of India (SEBI) has been proactive in regulating algorithmic trading. Recent regulations focus on ensuring that all trading algorithms are authorized and certified by exchanges. This includes a thorough vetting process, and brokers are required to ensure proper security measures are in place to prevent unauthorized algorithmic activities. Additionally, SEBI has tightened short-selling norms to prevent market abuses like naked short-selling, mandating that all investors honor their securities delivery obligations.

Ensuring Fair Play and Transparency

SEBI’s efforts extend to enhancing transparency in algorithmic trading. The regulator aims to ensure market participants are well-informed about the algorithms in use and their potential market impact. This includes exploring disclosure requirements, periodic audits, and real-time reporting mechanisms.

Risk Management and Market Surveillance

Amidst the surge in algorithmic trading, SEBI emphasizes robust risk management protocols and market surveillance mechanisms. These include comprehensive rules to mitigate sudden and extreme market events, and advanced technologies to monitor algorithmic activities and identify any irregularities.

Global Coordination and Protecting Retail Investors

SEBI’s approach also acknowledges the need to protect retail investors from the potential negative impacts of these advanced trading practices.

The Path Forward

SEBI’s regulations and guidelines aim to balance innovation in trading technologies with the need for market stability and fairness. Continuous collaboration among regulators, market participants, and technology providers is vital to strengthen the regulatory framework and adapt to the evolving landscape of the financial markets.

Conclusion

The Indian stock market is at a crucial juncture, where the adoption of advanced trading technologies like algorithmic and high-frequency trading is reshaping the market dynamics. SEBI’s evolving regulations reflect a commitment to ensuring a dynamic, fair, and resilient financial ecosystem. As these technologies continue to advance, the collaboration between regulators and market participants will be key to maintaining the integrity and efficiency of the Indian financial markets.

(Hemant Sood is the managing director of Findoc. Views expressed are the author’s own. Please consult your financial advisor before investing.)