Securities and Exchange Board of India on Algo Trading Supervision

Friday, 25 October 2024, 00:09

Securities and Exchange Board of India (SEBI) is considering the supervision of algo trading through a performance validation agency led potentially by credit rating agencies. This comes amid ongoing discussions on the best organization to oversee algorithm-based trading platforms. The proposed framework aims for stringent validation processes to ensure accountability and transparency in algo trading. As a result, regulations may face delays until a decision is reached.
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Securities and Exchange Board of India on Algo Trading Supervision

Securities and Exchange Board of India Takes Action on Algo Trading

In a move to enhance the integrity of algorithm-based trading, the Securities and Exchange Board of India (SEBI) is assessing the establishment of a performance validation agency (PVA). Under this proposal, credit rating agencies may supervise the PVA, responsible for validating the performance of algo trading strategies.

Compliance and Validation Process

The framework proposed emphasizes the registration of algorithms with the stock exchange prior to validation. Algorithm providers are required to demonstrate the performance of their strategies within a controlled environment for at least six months. This rigorous testing will ensure that only quality algorithms receive validation.

  • Agency Responsibilities: The PVA will verify performance metrics calculated by algorithm providers.
  • Transparency: Algorithms will be categorized to streamline the validation process.

Addressing Algorithmic Trading Risks

The report highlights significant risks associated with algorithmic trading, particularly regarding the potential overfitting of models to historical data. The formation of a comprehensive validation methodology aims to mitigate these risks, ensuring platforms meet high performance standards.

Once operational, the PVA is expected to greatly enhance the credibility of algo trading platforms in financial markets, protecting investors and maintaining market integrity.


This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.


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