“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,” Kamath said, adding that an algo strategy is only as good as the person who creates it.
“The same person who’s influenced by fear, greed, and 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.”
In a circular to stock brokers last week, Sebi warned against unregulated platforms offering algorithmic trading services to investors for automated execution of trades. Such services and strategies are being marketed with claims of high returns on investment, it had said.
Such stock brokers have been restricted from making any reference to the past or expected future return of the algorithm as well as associating with any platform that provides any reference to the past or expected future return of the algorithm, Sebi had said.
The fact that these algo platforms could claim whatever without any disclosures was a loophole that is now plugged, Kamath said.
“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,” he added.