What is Black Box Trading System?

Black box trading is a term generally used for automated trading systems. This system is also called Algorithmic Trading or algo trading. It is basically a computer based trading system for individual investors that uses a set of fixed rules to buy and sell signals. It is known for secrecy surrounding methodology employed in analysis. Institutional traders that are involved in the execution of huge orders in the markets but are unable to support all the size at once make use of black box trading.

Aspirants would find this topic helpful in the IAS Exam.

What is a Black Box Financial Model?

A black box financial model, is a catch-all term used to describe a computer program designed to transform various data into useful investment strategies.

What is Black Box in Economics?

In Economics, a black box is a system which can be viewed in terms of its input and output (vectors), without any knowledge of its internal workings or the possible interactions with the environment. Its implementation is opaque or black.

Why Does Algorithmic Trading Need to be Regulated?

India is one of the very few countries in the world which has mechanisms for controlling the misuse of algo trading. There are multiple reasons behind the need for regulation.

1. To reduce the instances of misuse of automated trading systems.
2. Flash crashes have happened overseas.
3. India has also witnessed instances of flash crashes which could be minimized.

What Percentage of the Market is Black Box Trading or Algorithmic Trading?

The popularity of algorithmic trading or black box trading has grown by leaps and bounds. Couple of years back the share of algorithmic trading in India was estimated to be around 40% whereas in Developed economies like the US, it is more than 70%. In the world market the compounded annual growth rate was estimated to be around 10%.

The above details would help candidates prepare for UPSC 2021.

Related Links