SEBI prohibits brokers from associating with unregulated algo trading platforms

06 Sep 2022

A few thoughts on the Indian broking industry and updates about @zerodhaonline as we turn 12 years old. Check out this post on Z-Connect. Some of these platforms have built utilities using broker APIs or macros when APIs aren’t available to automate order placements for their users & claim to be partners. We have been reaching out to all these platforms, asking them to remove our names from their website.

I am guessing SEBI is asking this because it is easy for these platforms to sell greed by showing extraordinary backtested returns to lure customers. There is a misconception that algo trading generates guaranteed returns. Finding strategies that trade more frequently to seem profitable isn’t hard. But in almost all cases, the high returns drop sharply or even vanish once you account for impact costs and trading costs.

An algo strategy is only as good as the person who creates it. The same person who’s influenced by fear, greed, & other biases. Also, we all know that past returns don’t guarantee future performance or results. Even when there are real historical returns, like in the case of mutual funds, SEBI insists on various risk disclosures. The fact that these algo platforms could claim whatever without any disclosures was a loophole that is now plugged.

I only hope that the circular expected on use of APIs & Algos post the discussion paper from last year doesn’t block out or make it extremely hard for retail customers with programming knowledge using APIs for personal use, becoming collateral damage.

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