For all the talk that computers are smarter than human beings, the fact remains that computer-driven algorithmic trading has also led to some bad experiences for market participants. It’s true that human traders are also prone to errors such as fat-finger trades, but there is ample empirical evidence that faulty algorithms can put the entire market at risk.
The flash crash on 6 May 2010 in the US was a wake-up call for the Securities and Exchange Commission. In India, the alarm bells started ringing louder after a faulty algorithm caused unusually large trades on BSE during its Muhurat trading session a few months ago. Securities and Exchange Board of India, on its part, has said that it will do a thorough review of the risk management system with respect to algorithmic trading.
In this backdrop, it was interesting to note some of the comments made at the recent TradeTech India 2012 conference, an annual meet held for users and vendors of electronic trading services. A broker offering electronic trading services said during a panel discussion that there is a need for greater regulation of risk management systems of firms that engage in electronic trading. It’s rather rare to hear a regulated entity making a call for greater regulation. But it must be noted that firms have to be prepared for more regulation, whether they like it or not. This is because regulators across the world are worried about the risks posed by algorithmic trading to the markets.