Regulating Algorithmic And High-Frequency Trades: Can SEBI’s Regulations Differentiate Green From Grey In The Indian Market Scenario?

Darshan N Rao, B.Com. LL.B., Ramaiah College of Law (Affiliated to Karnataka State Law University; Hubli, Karnataka)

ABSTRACT

The Union Budget this year, included a rise in the tax rate on futures and options, iterating the relevance of algorithmic high-frequency trades which are characteristically, driven by the speed and swing of catalytic methods, showing its ever-growing impact in this segment and markets in toto. Tech- savvy traders and investors make money based on the volume and speed of their trades via sophisticated algorithms and computer infrastructure based on the volume and speed of their trades rather than by employing traditional trading techniques. It is latency-sensitive, i.e., executed with a minimal time gap, marked by a rise in daily portfolio turnover and an increase in the ratio between orders and trades. Since several extremely complex algorithms and short-term investment horizons lead to many trading strategies and practices, there is no single definition of HFT. Corporate bigwigs have performed high- frequency trading to top the charts of cut-throat competition levels, which has resulted either in a sudden surge or a nosedive in stock prices. This has most of the time imperilled the position of modest investors, due to its “uncertain” aftermath. Regulating this trading practice thereby becomes imperative and regulators around the world have been working in this direction for years. The securities watchdog, SEBI, has also demonstrated awareness of the risks associated with HFT in India by proactively implementing measures to regulate it. However, the process of developing a robust framework has become a race on an icy track, that requires finding the ideal ratio to foster innovation and maintain market integrity. The paper explains the impact of the HFTs in India and abroad, regulatory aspects, techniques to counter increasing HFTs and the ensuing challenge of drawing a line between such trades executed with and without bonafide objects, when they are driven by Artificial Intelligence (AI), in this era of digital supremacy.

Keywords: High-frequency trades, SEBI, market integrity, digital supremacy