Selective regulation of Proprietary Algorithmic Traders' strategies needed: IITM study
IANS 10 January 2022
In a first of its kind study, researchers at the Indian Institute of Technology, Madras (IITM), are studying the impact of algorithmic traders (ATs) on the stock market.
 
They also said a selective regulation of Proprietary Algorithmic Traders' (PAT) strategies is necessary.
 
The research focused on processes that happen when computer programmes predict market order flow and take over the trading process, said IITM.
 
The researchers in their ongoing study will investigate the impact of (PAT) and Buy-side Algorithmic Traders' (BATs) trading on market quality and vice versa.
 
According to IITM, the study has significant welfare implications for the securities market as in algorithmic trading, computer programmes trade faster than human traders.
 
The IITM said research on AT has just started to emerge. Some of the literature that favours ATs suggests that they offer better prices through lower-order placement costs and update quotes faster.
 
However, other studies suggest that ATs create a 'barrier to entry' situation for human traders, which deteriorates the market quality significantly.
 
This research was led by professor P. Krishna Prasanna from the Department of Management Studies, IITM, and Devika Arumugam, Fulbright fellow and a PhD scholar at the Department of Management Studies, IITM.
 
It examined the impact of ATs on the National Stock Exchange (NSE). The findings were published in the reputed peer-reviewed journal Applied Economics, Taylor and Francis.
 
Elaborating on the importance of the research, Prasanna said, "Existing studies consider ATs as a homogenous group, which is far from reality. ATs use different algorithms based on their source of funds. So, they are classified into two categories - Proprietary Algorithmic Traders (PATs) and Buy-side Algorithmic Traders (BATs)."
 
According to Prasanna, the crucial difference between the two is that PATs trade with their own funds, and their algorithms are arbitrage seeking, while BATs trade with their clients' funds and their algorithms are predominantly cost reduction seeking.
 
The key learnings and outcomes from this ongoing research include:
 
* PATs and BATs trade differently and have a differential impact on the market quality
 
* PATs' cancellation increases the quoted spread, while BATs' order placement reduces the same
 
* BATs crowd out PATs' orders, but not vice versa
 
Researcher Arumugam said, "These new findings have substantial financial and regulatory implications. Traders and regulators stand to gain from the market quality enhancing capabilities of BATs."
 
Also, as PATs and BATs trade differently, they have a differential impact on the market quality.
 
PATs' cancellation significantly increases the quoted spread, while BATs' order placement reduces the same.
 
The researchers also examined whether PATs and BATs exhibit a "hide-and-seek" behaviour and find that BATs crowd out PATs' orders but not vice versa.
 
However, selective regulation of PATs' strategies is necessary, IITM said.
 
As BATs crowd out PATs, it suggests that the rivalry among ATs can counteract any market imbalances created by price distorting and aggressive algorithmic strategies, thereby enhancing the price efficiency.
 
These results are primarily based on ATs' order placement and cancellation activity in the market.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

Comments
Peaceful Coexistence Does Not Work in Board Rooms: M Damodaran, Ex-chief of SEBI
Moneylife Digital Team 10 January 2022
“If the relationship between the board and the management is not one of constructive tension, I believe no company will extract value from the board and know the board will extract value from the bench. While peaceful coexistence...
RBL Bank and RBI’s Christmas Bombshell Needs Clarity
Sucheta Dalal, 31 December 2021
Investors, depositors and employees of RBL Bank, and those whose job it is to track the banking world, had their Christmas celebrations rudely disrupted with a bombshell communication to stock exchanges from its board of directors....
Union Govt Revises Pecuniary Jurisdiction; District Consumer Commission's Limit Revised to Rs50 Lakh from Rs1 Crore
Moneylife Digital Team 31 December 2021
The Union government has notified the Consumer Protection (Jurisdiction of the District Commission, the State Commission and the National Commission) Rules, 2021. Under the revision, the district commission can entertain complaints...
Private Cryptocurrencies Pose Risk, Prone to Frauds, Illegal Acts: RBI Report
IANS 30 December 2021
The Reserve Bank of India (RBI) on Wednesday said the proliferation of private cryptocurrencies across the globe has sensitised regulators and governments to the associated risks.
 
According to the report,  cryptocurrencies...
Free Helpline
Legal Credit
Feedback