The Securities and Exchange Board of India (SEBI) on Wednesday proposed to include algorithmic trading and proprietary trading in its master regulations.
The regulator floated a consultation paper to revamp regulations of stock brokers (SBs). These aim to ease the compliance burden, harmonise with the Companies Act and add definitions and market practices in line with technological advancements.
“There have been several significant changes in the regulatory landscape with regard to compliance requirements for stock brokers and several amendments have been made to SB regulations. A need was thus felt to review and realign SB regulations with these developments…” SEBI said.
Defining Algorithmic and Proprietary Trading
The current regulations do not have any definition for algorithmic trading. To cover such trades by brokers, SEBI has proposed to include the definition of algorithmic trading. “Algorithmic trading means any order generated/placed using automated execution logic. After the introduction of execution only platform (EOP) segment, the SB regulations were amended to carve out separate requirements for EOPs to maintain books of account, records and documents and other requirements related to fees, deposit, variable net worth, etc.”
Easing Compliance and Ensuring Investor Protection
SEBI had constituted a working group comprising exchanges, brokers, legal experts, academicians and representative of investor associations with the objective to simplify, ease and reduce cost of compliance, while ensuring investor protection. The panel has proposed to amend regulations to remove inconsistency and bring parity with sub-regulations within the same regulations and also with other intermediary regulations.
Once the proposals are formalised, changes to the norms may require approvals from the SEBI board.
The new definition of EOP means any digital or online platform which facilitates subscription, redemption and switch transactions in direct plans of schemes of mutual funds.
A definition has also been proposed for proprietary trading: It now means trading in any segment of a recognised stock exchange by a stock broker using its own funds to profit from market moves.
The term ‘clearing member’ suggests persons having clearing and settlement rights in any recognised clearing corporation, and shall include any person having clearing and settlement rights on a commodity derivatives exchange.
The regulator has also proposed to not define “small investors” by their trade size – buying or selling securities on a cash transaction for a market value not exceeding Rs 50,000 in aggregate on any day – anymore.
While granting the certificate of registration to a stock broker, the board shall take into account that in case of a company, it has to have at least one designated director, who stays in India for a total period of not less than 182 days during a financial year.