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The financial vulnerabilities of the stock markets resulting in manipulation and perversity needs to be checked in order to promote fair and ethical trading practices, Finance Secretary Ashok Lavasa said on Monday.
"There is a dilemma between what technology and manual trading can provide. Increase of algorithm trading should not prevent people from participating in the stock market," Lavasa said here at a seminar on 'Policy and Regulatory Framework for Algorithm/High Frequency Trading in India'.
"But manipulation, perversity in market needs to be dealt with. Financial vulnerabilities are to be dealt with," he said.
The seminar was jointly organised by the Department of Economic Affairs and the National Institute of Financial Management.
In India, 50 per cent of trading is through algorithm trading, which reduces transaction cost, brings liquidity and benefits short term traders.
Lavasa said that the Indian stock market has matured and is hailed as one of the most powerful in the world.
"As we move forward, we are talking of more equity. So, it needs to be regulated and managed in a transparent way. It should have reliable infrastructure to involve more and more participants," he added.
Algorithm and high speed trading are two crucial factors of stock exchange trading. Asian countries were the first to introduce high frequency trading.
Economic Affairs Secretary Subhash Chandra Garg, who was also present at the seminar, said that algorithm trading is becoming more important and significant.
"Data, math and logic are key elements of algorithm trading. Over the last few years, the capacity and data available to build algorithm is tremendous," Garg said.
He said that on the policy front, the government needs to ensure non-discriminatory and equitable and fair access to all the market participants.
"The policy question is whether we can provide equitable market access to machine (algorithm trading) and manual trading space. In algorithm trading space, institutional players also should be assured non-discriminatory and equitable policy," he said.
Garg said that the basic objective of market participants is to maximise wealth and there was nothing wrong about it, but there was need for regulations to facilitate and protect traders and prevent disruptions.
"Ability to write algorithm can be used to create disruptions. There is need for polity to control risky and non-competitive algorithm. Policy should focus on how to facilitate right kind of algorithm to maximise profit," he said.
While focussing on these practical aspects, it is advisable to have the kind of technical capability required in stock exchanges, he said.
"We need to constantly catch up in technology, if not stay one step ahead," he added.