There is no way for a broker to know what is happening on a client’s machine, Nikhil Kamath, Co-Founder and CFO of Zerodha, said in an interaction with CNBC-TV18. The remark from Kamath comes a day after market regulator SEBI proposed a regulatory framework for algorithmic trading or algo trading by retail investors, in a bid to protect investors' interest and prevent market manipulation.
Kamath believes SEBI's concern is more about curbing platforms that mis-sell, and about retail participants who may not understand algo trading.
Zerodha may need to stop offering application programming interface, he said.
“These orders that come from APIs, they come through all the checks and balances that exists on a web trading platform. Someone could manually be doing it, and someone could be doing API, it doesn't make any difference. These APIs, we are not talking about high-frequency trading kinds of setups. These APIs are very low latent. I mean, it is in a millisecond. So it's almost like a human placing an order,” he said.
Zerodha's Kamath also said that less than five percent of Zerodha's active orders come from APIs.
“Customers who understand programming languages, who understand programming, who want to consume their data using a program, and then the ability to place orders using a program. So, brokers have been offering APIs like us, there are many brokers who offer API's,” he said.
“However, one of the things that happened over the last few years is that there have been a lot of these algo trading platforms that have come up, where you get this off the shelf strategies that claim to make money and there has been a growing popularity of these platforms, but there has also been growing complaints that are coming through these platforms because these platforms claim to make it almost seems like, it's almost easy to make money and so SEBI has had this concern and they have been interacting with the industry for a while on this,” said Kamath.
Zerodha is the country's largest brokerage by client base.
Under the proposal, SEBI has suggested that all orders emanating from an API should be treated as an algo order and be subject to control by a stockbroker.
IT also said that the broker needs to take the approval of all algos from the exchange. Each Algo strategy, whether used by broker or client, has to be approved by exchange and as is the current practice, each algo strategy has to be certified auditors. Brokers will also deploy suitable technological tools to ensure that appropriate checks are in place to prevent unauthorized altering or tweaking of algos, it said.
Algo trading refers to any order that is generated using automated execution logic. The algo trading system automatically monitors live equity prices and initiates an order once a given criterion is met. This frees the trader from having to monitor live stock prices and initiate manual order placement.