A report indicate that SEBI is poised to regulate algorithmic (algo) trading platforms and strategy providers, aligning their oversight with that of investment advisers or research analysts. Under this initiative, algo strategy providers would undergo mandatory examinations, and a Performance Validation Agency (PVA) would be established to verify promised returns.
This would be an excellent step to bring the growing Algo platforms and Strategy providers under a legit roof. The examinations can ensure some baseline intellect and PVA would bring about transparency and a clear comparative performance metric as well.
I guess we will have to wait for the fine print to get a better hang on where regulations are heading. But this is my view on the subject
I think a retail guy trying to consume API for personal use should be exempted from whatever regulation is going to come. 15 yrs ago I used to trade with Amibroker - Interactive brokers in auto mode because IB provided that feature to autotrade. Since then many more brokers have exposed their APIs. Making it hard for the retail to consume these either by way of more paperwork or money barriers is regressive and shouldn’t happen.
Commercial Algo platforms can be regulated to ensure that they run stable execution platforms. They can be brought under similar sort of technical risk assessment framework that broker platforms operate in. After all what they are giving is a frontend platform like broker trading apps connected to multiple broker backends via api. This will ensure better reliability of executions.
Who will be the PVA is a question ? Will they validate the performance based on back test metrics alone or will they need the source code and core concepts used ? If so it is asking the algo provider to disclose his IP Also I wonder whether there are enough people in this country who have a profitable trading track record along with skills to objectively analyse a system. Also no such PVA scheme exist for RA and IA. Their assessment is based on their grip on mostly fundamental theory alone and not based on their real market performance.
I think if a client can view the backtest results based on data that is not under the control of the algo provider, he should be fine. What I would worry about is a strategy that has only claims and no objective backing to support it - a lot of what is out their currently falls in this segment.
If regulators make it harder to on board in to algo ecosystems it is going to reduce participation. The percent of population financially able to trade in the stock market is not going up significantly in the near future. This would mean that the cut would come from the existing active trader base which is already abysmally low.
Also I wonder whether there are enough people in this country who have a profitable trading track record along with skills to objectively analyse a system. Also no such PVA scheme exist for RA and IA. Their assessment is based on their grip on mostly fundamental theory alone and not based on their real market performance.