Worried, but no plans to ban algorithmic trading products: Sebi

Sebi is not looking at banning these products, Sebi Chairman 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, 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," 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.

Joining Sinha, BSE Managing Director and Chief Executive Madhu Kannan said when he joined the premier exchange two-and-a-half-years ago, "Only 5 per cent trades on the BSE used to take place using algo products, but this has now gone up to 25 per cent."

Addressing the Association of National Exchange Members of India last week, Sinha had warned that the market regulator would not allow anybody to mess with its system in the backdrop of some members being allegedly involved in manipulation.

"We have an effective risk management system, but we would not compromise. That is why we are ready to review," he had added.

Sinha had also hinted that the proposed review would consider changes in the margin system and for determining the capacity to take the trades. The secondary market advisory committee had discussed the matter at its November 11 meet.

On the introduction of new products, Sinha said, "We are going to be very cautious about allowing new products, especially if we perceive they are going to be risky."

He also added that the market watchdog fully supports products in the infra space, like infra debt funds.

"Without infra growth we cannot have high growth," Sinha said.