By Ananya Grover
The Securities and Exchange Board of India (Sebi) has allowed participation of retail investors in algorithmic trading starting August for faster order execution and improved liquidity. Currently, only institutional investors are permitted to use the pre-defined programmes for trading.
For this, the regulator has come up with a framework that spells out the rights and responsibilities of main stakeholders of the trading ecosystem such as investors, brokers, algo providers/vendors and market infrastructure institutions (MIIs).
Under the framework, retail investors will get access to the approved algos only from registered brokers, which will safeguard the interest of these investors. This facility is to be provided by stock brokers only after obtaining requisite permission from the stock exchange for each algo.
“All algo orders shall be tagged with a unique identifier provided by the exchange to establish the audit trail, and the broker shall seek approval from the exchange for any modification or change to the approved algos,” the regulator said.
It added that brokers will be solely responsible for handling investor grievances related to algo trading and the monitoring of application programming interfaces (APIs) for prohibited activities. “For better oversight, any algo provider, providing the facility to place algo orders with brokers, through API, will be required to be empanelled with the exchanges,” the circular said.
Sonam Srivastava, founder and fund manager at Wright Research, said: “Overall, Sebi’s regulatory approach effectively reduces risks associated with retail algo trading, but implementation challenges and potential barriers for smaller firms need to be addressed to strike a balance between investor protection and market accessibility.”
She added that brokers face significant operational and compliance challenges under the market regulator’s new framework.
They must register, approve, and monitor all algo orders, implement strict API security measures, and ensure traceability through unique identifiers. Additionally, brokers will have to bear sole responsibility for addressing investor complaints, increasing legal liabilities and customer service costs. The requirement to perform due diligence on algo providers adds complexity as the exchanges still need to define clear empanelment criteria.
The implementation standards shall be formulated by the Broker’s Industry Standards Forum under rules of the stock exchanges and in consultation with Sebi by April 1, 2025.
A Sebi draft paper in December had said, “The evolving nature of algo trading, particularly with the increasing demand for algo trading by retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in algo trading with proper checks and balances.” After the paper was released, fund managers raised execution concerns.
The recent circular noted that algo trading provides significant advantages of timed and programmed order execution. At present, there are mechanisms, such as direct market access facility, which enable institutional investors to trade through algorithms.
In September 2022, brokers were prohibited from from partnering with unauthorised algo trading platforms which had promised big returns, but resulted in losses for investors.