Does algo trading offer guaranteed returns? Zerodha boss Nithin Kamath explains

There is a misconception that algorithmic trading offers guaranteed returns, Zerodha co-founder and CEO Nithin Kamath said on Tuesday. The remarks come after Sebi’s new guidelines on the returns claimed by unregulated platforms offering algorithmic strategies for trading. With these standards, Kamath believes the loophole in algorithm trading has been “plugged”.

To prevent acts and instances of mis-selling and to protect the interests of investors in the securities market, Sebi announced last week that securities brokers who provide algorithmic trading services will not directly or indirectly make any reference past or future expected return / performance of the algorithm.

Sebi’s adjustment in algorithmic trading comes after taking note of unregulated platforms offering algorithmic trading services/strategies to investors for automated trade execution. These services and strategies are marketed with “claims” to high returns on investment.

Additionally, “ratings” have been assigned to the strategies, which could lead investors to be drawn to such claims. This may amount to mis-selling these services and strategies to investors.

Via his Twitter account, Nithin said, “I guess SEBI is asking for this, because it’s easy for these platforms to sell greed by posting extraordinary, verified returns to attract customers.”

He added: “There is a misconception that algo trading generates guaranteed returns. It’s not hard to find strategies that trade more frequently to appear profitable. But in almost all cases, high returns drop sharply or even disappear once you factor in impact costs and transaction fees.”

The market watchdog also prohibited stockbrokers from associating directly or indirectly with any platform providing a reference

past or future returns/performance expected from the algorithm.

In addition, Sebi ordered that stockbrokers who directly/indirectly refer to any past or future expected return/performance of an algorithm or who are associated with any platform providing such a reference, remove it from their site. Web and/or dissociate platforms. provide these references, where applicable, within seven days of the date of this circular.

Nithin explained by saying, “An algo strategy is only as good as the person who creates it. The same person who is influenced by fear, greed and other biases.” Furthermore, he added, “we all know that past performance is no guarantee of future performance or results.”

Even where there are true historical returns, as in the case of mutual funds, the CEO of Zerodha said, “SEBI insists on various risk disclosures.” adding, “the fact that these algo platforms could claim anything without any disclosure was a loophole that is now plugged.”

“I just hope that the expected circular on the use of APIs and Algos after last year’s discussion paper doesn’t block or make it extremely difficult for retail customers with programming knowledge to use APIs for personal use, becoming collateral damage,” he added. .

He further stated that some of these platforms have created utilities using APIs or broker macros when APIs are not available to automate commands for their users and pretend to be partners. Adding that he said: “We contacted all these platforms, asking them to remove our names from their website.”

Zerodha CEO reiterated that they have no such partnerships with algo trading platforms that claim historical returns on the strategies.

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