2 hours Ago By Ishika Gupta
Explainer The Securities and Exchange Board of India (SEBI) proposed a regulatory framework to facilitate safer participation of retail investors in algorithmic trading (algo trading) through brokers. The framework expands on the market regulator’s 2012 guidelines on Algorithmic Trading, an automated mechanism that uses computer programs to automatically purchase and sell stocks relying on set rules. Use of API for algo trading SEBI outlined that for algo trading, application programming interfaces (APIs) provided by brokers, wherein he/she acts as the principal and any algo provider (including fintech firms or vendors) acts as an agent, must be used.
Further, “tech-savvy retail investors” who develop algorithms must register them with the stock exchange if the algorithms meet the specified order-per-second threshold. Retail investors can use these algorithms for personal and family investments but cannot offer them to other investors. The framework also stipulates that brokers should tag all orders conducted through the API interface with a stock exchange-provided “unique identifier.
” What Must Brokers Ensure? During algo trading, brokers need to keep track of several points: How will algo providers be empanelled? Stock exchanges must empanel algo providers in the manner they prescribe, despite those providers not functioning as SEBI-regulated entities. The broker must also fulfil due diligence before onboarding an empanelled algo provider on its platform. Finally, algo providers and brokers may share subscription charges and brokerage fees, provided they disclose all associated costs to clients transparently.
How will algos be categorised? Algos will be divided into two sections for trading purposes- Execution or White box algos (where the logic is disclosed and replicable) and Black box algos (where the user remains unaware of the logic and the system is not replicable). For Black box algos, the provider must register as a research analyst and maintain a detailed report documenting the algorithm’s functionality and impact. Additionally, the provider must register the algo as a fresh algo when the logic governing it changes and subsequently maintain a detailed research report.
Responsibilities of stakeholders Brokers who facilitate this process must abide by the existing algo trading provisions. Further, algo orders should be tagged with a unique identifier provided by the Exchange to establish an audit trail and the broker must seek the Exchange’s approval before any modification to the approved algo, among other duties. SEBI mandates that Exchanges continue their supervisory function over algorithmic trading by undertaking activities like establishing a standard operating procedure (SOP) for algo testing, surveilling algo orders & behavioural monitoring, and utilising a “kill switch” to halt orders from a particular algo ID.
Concerning brokers, they must inspect their ability to distinguish between non-algo and algo orders. Exchanges must also specify the turnaround time (TAT) for certain algorithms like Execution algos on a fast-track basis while registering others on a normal basis and publish these particulars on their websites. Finally, stock exchanges must also furnish FAQs about several aspects like roles and responsibilities of brokers & algo providers and the data flow between the two and the Exchange to ensure the broker’s compliance with the necessary guidelines, among others.
The stock exchanges and SEBI tasked the Broker’s Industry Standards Forum with formulating the implementation standards by April 1, 2025. Consequently, these provisions would go into effect from August 1, 2025. Why this matters? As per current norms, only institutional investors can access algorithmic trading through SEBI’s Direct Market Access Facility.
For context , this facility allows brokers to offer clients direct access to the exchange trading system through the former’s infrastructure without any manual intervention. The framework’s review comes in light of the surge in demand for algo trading by retail investors and to ensure the safeguarding of investor interests and ‘market integrity’, claims SEBI. This follows a 2021 paper by the body on “ Algorithmic Trading by Retail Investors “, where SEBI first proposed the use of API access and automation of trades by retail investors.
The extension of this facility to retail investors would allow them to avail of its various benefits like faster execution, low latency, reduced transaction costs, removal of human errors, and automated checks on multiple market conditions, alongside enhancing market liquidity . Also Read: Support our journalism: For You.
