India’s Sebi signals extension of algo trading to retail investors

Good morning. India’s stock market regulator would like to bring the benefits of algorithmic trading to all investors — it is currently restricted to foreign funds and proprietary traders. I’m also keeping an eye on parliament, where there’s talk that the One Nation One Election bill could be introduced this week. We’ll know more today. Plus, the cost of India’s huge spam call problem.

Let’s go algo

Last Friday, after holding out for years, India’s stock market regulator, Sebi, signalled that it was likely to open algorithmic trading to retail investors. In September, the board published a study that showed that algo trading was responsible for 97 and 96 per cent of the profits in the futures and options segment of foreign investors and proprietary traders respectively. 

Sebi’s draft guidelines are tight: each algorithm will have to be approved by the stock exchanges, and all orders will be tagged by unique identifiers so they can be traced and audited accurately. Even individual “tech-savvy” investors will be able to approach the exchanges through their brokers to register their algos. Sebi has split algos into two categories: white box, whose logic and rules are public, and black box algos, which are closed to external scrutiny. The regulator has codified specific rules for each, and mandated that stock exchanges have access to a kill switch in order to ensure that rogue algos don’t result in price manipulations in the market.

The regulator is right to temper enthusiasm with caution in opening algo trading to all investors. The past few years have witnessed tremendous participation by retail investors — many of whom are young and technologically knowledgeable — in the stock markets, and it would be unfair to deprive them of the opportunities that large fund houses can enjoy. At the same time, the fast-paced nature of these transactions leaves investors vulnerable to big losses, especially in the futures and options segment. Additionally, there is the ever-looming shadow of fraud (which is inadvertently turning out to be the word of the day in today’s newsletter) and it is the board’s responsibility to protect investors from unscrupulous operators running dubious algorithms. 

Initial responses to these rules have criticised their tedious nature. Registering each algorithm with the stock exchange will most certainly be a time-consuming process. White box algos will be prone to easy duplication and institutional investors continue to have an edge because these restrictions do not apply to them. But Sebi is probably investing in the wisdom of taking baby steps. I don’t blame them.

The draft guidelines are open for public comments until January 3. If you have any ideas or suggestions, head over to Sebi’s website and record them.

Do you think Sebi’s rules are good for retail investors? Let me know at [email protected] 

More news you should know

1. The Federal Reserve is poised to cut US interest rates this week, about a month before Donald Trump returns to the White House

2. OpenAI has an Elon Musk problem. 

3. How much are two tonnes of banknotes worth? About $250mn — the amount, in cash, Bashar al-Assad airlifted to Moscow between 2018 and 2019.

4. Employers are struggling to regulate the use of AI in the workplace. 

5. Even locked up, Imran Khan remains a threat for Pakistan’s military.

Spam sandwich

Over the past seven days, I received four spam calls on average each day. This is nearly three months after my mobile service provider, Airtel, launched its sophisticated AI-powered spam call filtering system. Last week, Airtel said the filter had flagged 8bn calls and 800mn messages in the 10 weeks since it was rolled out. That’s a million spammers every day, which accounted for 6 per cent of all calls, the company said. 

These numbers are staggering. Spam calls are not just a nuisance (anyone who has tried to take a nap on a weekend afternoon will use a stronger word than that), they are also the feeder system for cyber fraud. Indians lost Rs113.3bn to such frauds in the first nine months of this year, according to data reported from the Indian Cyber Crime Coordination Centre. Stock trading and other investment scams constituted the largest chunk of this, accounting for more than 325,000 complaints filed. “Digital arrests” — a scam where uniformed (fake) law enforcement officials appear on video calls to extort victims — accounted for the second-highest share, with more than 63,000 people losing Rs16.16bn. They have become so prevalent that even Prime Minister Narendra Modi cautioned people against them in his radio programme. In most of these cases, the scamsters approached their victims through spam calls or messages.

In an interconnected world, it is not easy to wipe out cyber fraud. But it is puzzling why this is not a priority for the government and the telecom regulatory authority. There is, understandably, a high degree of suspicion about data security in India, and a leak-proof Do Not Disturb (DND) registry is step one in building trust in the system. It is also baffling that a year and a half after India’s data protection act was enacted, the government has yet to notify the rules that will govern the legislation. With the success of UPI and the wide acceptance of digital payments, India is seeking to be a global leader in providing mass-market digital solutions. It is imperative that we get our act together on data security sooner rather than later. 

Go figure

India’s D Gukesh beat Ding Liren to become the youngest world chess champion. Here is how old he was for the big milestones in his career.

My mantra

“Everybody’s built differently and every CEO runs the business based on his strength. I am an engineer, a technician — I think in a technical way and technology is important for me. For example, my peer who is head of a large conglomerate is a chartered accountant. He looks at everything from a cost perspective, from a finance perspective, and he has done marvellously. Somebody else has more of a management background and they look from that perspective. I’m an engineer so I look from that perspective. And as they say, there are different routes to get to God.”

— Sajjan Jindal, chair, JSW Group

Each week, we invite a top Indian business leader to tell us their mantra for work and life. Want to know what your boss is thinking? Nominate them by replying to [email protected]. 

Quick question

The One Nation One Election bill proposes simultaneous elections to be held for the Lok Sabha and state assemblies.

Do you think “One Nation One Election” is a good idea? Take part in our poll here.

Thank you for reading. India Business Briefing is edited by Tee Zhuo. Please send feedback, suggestions (and gossip) to [email protected].