SEBI has introduced a stricter framework for algorithm trading to safeguard retail investors through enhanced oversight. The Brokers’ Industry Standards Forum has been assigned the task of developing implementation standards by April 1, after which the new regulations will come into effect on August 1.
The objective is to address regulatory loopholes for retail investors interested in utilizing algos and SEBI’s Direct Market Access (DMA) facility for quicker order execution and enhanced liquidity, a privilege previously limited to institutional investors.
Algorithmic trading involves the use of pre-defined computer programs to execute trades based on market price and volume fluctuations.
The new regulations stipulate that brokers can only engage with algo-trading providers endorsed by stock exchanges, who will oversee algo trading, set criteria for onboarding, and validate the use of specific Application Programming Interfaces (APIs). Additionally, algos created by tech-savvy retail investors must be registered with the exchange through their broker if they surpass a specified order per second threshold.
Furthermore, the regulator has mandated the classification of algos into two categories – replicable and non-replicable algos, referred to as white box and black box algos, respectively. Each algo order will be labeled with a unique identifier to establish an audit trail.
The framework also outlines the responsibilities of stock brokers, stock exchanges, algo providers/vendors, market infrastructure institutions, and investors.
(SEBI expands algo trading to retail investors, new norms to take effect from Aug 1)
Published on February 4, 2025.
