SEBI has introduced a stricter framework for algorithm trading on Tuesday with the aim of protecting retail investors by implementing checks and balances. The Brokers’ Industry Standards Forum has been assigned the task of formulating implementation standards by April 1, after which the new norms will come into effect from August 1.
The objective of this move is to address regulatory gaps for retail investors who wish to utilize algos and SEBI’s Direct Market Access (DMA) facility for quicker order execution and enhanced liquidity, which was previously predominantly utilized by institutional investors.
Algorithmic trading involves the use of pre-defined computer programs to execute trades based on changes in market prices and volumes.
According to the regulations, only algo-trading providers empanelled with the stock exchanges will be allowed to onboard brokers. These empanelled providers will oversee algo trading, define the criteria for empanelment, and verify the use of specified Application Programming Interfaces (APIs).
SEBI stated in a circular that algos developed by retail investors with programming knowledge must also be registered with the exchange through their broker, only if they exceed the specified order per second threshold.
Moreover, the regulator has mandated the categorization of algos into two types – replicable and non-replicable algos, to be known as white box and black box algos respectively. All algo orders will be assigned a unique identifier to establish an audit trail.
The framework delineates the roles and responsibilities of stock brokers, stock exchanges, algo providers/vendors, market infrastructure institutions, and investors. These measures are aimed at expanding the scope of algo trading to retail investors while ensuring a secure and transparent trading environment.
