Black Box Trading

By : Neha Dhyani

Updated : Mar 21, 2022, 9:44

Trading with reference to the stock market means buying or selling shares or security. There are many approaches to trading, one of which is black box trading. It is also known as automated or algorithmic trading. With the increase in technology, automation is also increasing in every field, including the financial sector. Read on to find out more about black box trading!

Black box trading uses pre-coded logic based on a set of rules to identify buys and sells in the market. This system helps analyze the market based on pre-determined factors such as volume and price. The use of complex formulas and models in the code helps the traders make complicated decisions faster and with more ease.

How does the black box trading system work?

The system is named black box since the internal workings are secretive and not transparent. So, each system is different and unique. However, every black-box trading system starts with a trading strategy which is then converted to coding language, thereby integrating into the market.

Advantages and Disadvantages of Black-Box Trading System

The advantages of black box trading systems are:

  1. Accuracy: Since it is automated, the chances of error is very negligible.
  2. Speed: It can perform many complex calculations in less time.

The disadvantages of black box trading systems are:

  1. It leads to increased volatility in the market.
  2. Erroneous algorithms may lead to potential losses.

How common is black box trading in India?

Introduced in India in 2008, about fifty percent of the daily trading is done through algorithm trading. In developed nations such as the US, about seventy to eighty per cent of transactions happen through black-box trading. However, it is gaining popularity lately, even in India.

Is black box trading legal in India?

Black box trading is legal in India, with India's Securities and Exchange Board placing few restrictions. With the increase in popularity, there is an increase in the need for regulations around black-box trading practices. Therefore, the Securities and Exchange Board of India wants to increase regulations around black box trading practices.

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FAQs on Black Box Trading

Q.1. What is the future of black-box trading?

It is expected that there will be a tremendous increase in the use of black-box trading systems globally.

Q.2. Is black-box trading profitable?

Since black box trading is purely based on logic and there is no place for human emotions, black-box trading is said to be profitable when compared to manual trading.

Q.3. What is the need for regulating black box trading?

Unregulated or unapproved black box trading practices threaten the market. They can lead to a loss for the investors as many programmers are selling it as though profits are assured, leading to market manipulation. Therefore, regulating algorithm trading becomes very important.

Q.4. How does SEBI plan to regulate black box trading?

SEBI has proposed that every black box trading strategy needs to be approved by the stock exchanges before traders use them. They want to ensure that these algorithms are being developed after thorough research and analysis.