Zerodha co-founder and CEO Nitin Kamath on Tuesday said that there is a misconception that algorithmic trading provides guaranteed returns. The comments come after SEBI’s new guidelines on returns claimed by unregulated platforms offering algorithmic strategies for trading. With these criteria, Kamath believes, the loopholes in algorithmic trading have been “plugged in”.
In order to prevent acts and instances of wrongful selling and to protect the interest of investors in the securities market, last week, SEBI declared that the stockbrokers providing algorithmic trading services shall not, directly or indirectly, make any reference to the past or expected future returns/performance of the algorithm.
SEBI’s change in algorithmic trading comes after its focus on unregulated platforms, which offer algorithmic trading services/strategies to investors for automated execution of trades. Such services and strategies are being marketed with “claims” of high returns. Investment,
In addition, “ratings” are assigned to strategies, which can lure investors into such claims. This may equate to the mis-selling of such services and strategies to investors.
Through his Twitter account, Nitin said, “I think SEBI is asking this because it is easy for these platforms to sell greed by showing exceptional backtested returns to lure customers.”
He adds, “There is a misconception that algo trading generates guaranteed returns. Finding strategies that trade more often to appear profitable is not difficult. But in almost all cases, high returns tend to drop sharply. or disappear once you account for impact costs. Trading costs.”
The market watchdog also prohibited stockbrokers from being directly or indirectly associated with any platform providing any references
For the past or expected future return/performance of the algorithm.
Further, SEBI directed that stockbrokers who are directly/indirectly referring to any past or expected future returns/performance of any algorithm or are connected to any platform providing such reference, shall It should be removed from their website and/or removed from the platform. To provide such reference, as the case may be, within seven days from the date of this circular.
Nitin explained by saying, “An algo strategy is only as good as the person who created it. The same person who is affected by fear, greed and other prejudices.” Furthermore, he added, “we all know that past returns do not guarantee future performance or results.”
Even when there are actual historical returns, as in the case of mutual funds, the Zerodha CEO said, “SEBI insists on various risk disclosures.” Adding, “The fact that these algo platforms could claim whatever they were without disclosure was a loophole that has now been plugged.”
“I only hope to post a discussion paper from last year on the use of APIs and algos, not to make it overly difficult for retail customers with programming knowledge to use the API for personal use, collateral damage.” become,” he added.
He further added that some of these platforms have built-in utilities using broker APIs or macros when the APIs are not available for their users to automate order placement and claim to be partners. He further added, “We are contacting all these platforms and asking them to remove our names from our website.”
The CEO of Zerodha reiterated that he has no such partnership with the Algo trading platform which claims to have historical return on strategies.
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