Capital market regulator Sebi today said financial innovations should not pose any risk to the larger economic system and serve a social purpose.
Securities and Exchange Board of India Chairman U K Sinha also said algorithmic trading and frequency trading pose risk to the system as the regulator doesn't have the capacity to regulate it.
"I doubt, stock exchanges and Sebi have the capacity to control this (algorithmic trading and frequency trading). So, unless I am able to regulate it, I don't want to be surprised," he added.
Algorithm trading uses electronic platforms for trading with an algorithm deciding on aspects of the order such as timing, price or quantity of the order.
Though this kind of trading increases the speed of placing an order, it also contributes to the volatility in exchanges. Frequency trading is high-speed algorithm trading.
"Financial product innovation has to solve a social purpose and there has to be a regulatory capacity to look into it," Sinha told reporters on the sidelines of International Bar Association conference here.
Sinha said trading on the bourses can be accomplished within eight microseconds in the country.
He pointed out that current situation is difficult for the regulators all through the world.
"Given the global economic situation, challenges are rising for regulators and there should be stress tests for regulators, too, to determine whether they can withstand such kind of uncertainties in the broader economic environment," he said, adding the capital market regulator is working towards this.
