SIMPLY PUT: The algo fight is all about who should bell the bots

If you know the basics of buying and selling shares via online portals, you may know what a limit order is. You can tell the system that you would like to buy or sell a share if and when it hits a certain price.

Now, imagine that you want to add layers to this instruction, for e.g., I want to buy Nifty Futures every time it slips down to the 50-day moving average. Now, remember that if, say, the Nifty has gone up 10% in a month, the 50-day average at the end of the month is different from what it was at the start of the month. You could add multiple such instructions with algorithms that can trade on your behalf.

You can’t be staring at the screen all the time. But a bot, or an algorithm, can watch these levels for you and execute the trade even if you are busy watching funny videos on Instagram Reels.

This is commonly known as algo trading. You can read the basics of it here.

These are some of the examples of algos available in the market and how much they cost.

India’s market regulator Securities and Exchange Board of India (SEBI) said it wants to regulate trading done via bots and hell froze over. If you are new to this topic, the overwhelming chatter on both traditional and social media may have been of little help if the goal was to understand how it works and, therefore, what risks it poses. Simply put, it’s been portrayed as a battle between the man and the machine a la The Matrix.

In one phrase, everything that a human can do, intentionally, s/he can do it at much faster and at a much, much larger scale with the help of an algo. That includes the bad things as well.

The point is, with or without algorithms, rogue traders come and go, and ruin the market for everyone else. Then why is SEBI trying to tighten the leash on algo traders specifically.

With algos, you can trade in microseconds, you can execute a lot more trades via algo on any given day/hour/minute. And, if you’re a manipulator, you can hurt a lot more people, a lot quickly and severely, with the power of algorithms.

So, one point that everyone agrees is that this space needs to be regulated.

So, where is the disagreement? In the whos and hows.

Let’s first break down the many risks posed by the use of algo.

Now in each one of these cases, the issue may be genuine, but the disagreement is on how it should be tackled and who should be responsible for it.

Technology will always be a step ahead of regulations, and the regulators will have to catch up. However, one important thing we have learnt from The Matrix trilogy is that the future will be one where the bots and humans learn to coexist. Sooner the better.

There is room for consensus here and that would mean both sides, SEBI and the brokers, keep calm and talk. So, what are the possibilities for a consensus? Here’s an explainer.