The market regulator Securities and Exchange Board of India (SEBI) has proposed empanelment and registration of algorithmic providers and traders with the exchanges and also has asked tech-savvy retail investors to register the algorithms they have developed with the exchanges through their brokers.
Algorithmic trading, also known as algo trading, is a method of using computer programs to automatically execute trades based on pre-defined rules. It works using complex mathematical models and algorithms to analyse data and make trading decisions. These algorithms can take into account variables like price, time, and volume.
In a consultation paper released on Friday, SEBI has proposed a new framework to govern algorithmic trading by retail investors for ease of use with proper checks and balances.
The draft circular proposing new norms are open for public feedback until January 3.
The facility of algo trading shall be provided by a stock broker only after obtaining requisite permission from the stock exchanges for each algo, the draft paper said.
"The evolving nature of algo trading, particularly with the increasing demand for it 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. This is aimed at safeguarding investor interest as well as integrity of the market," stated the SEBI circular.
In the algo trading method, when the predefined conditions are met, orders are placed at a speed and frequency that is impossible for a human traders to execute.
Though like any other trading tool, algo-trading is also not flawless or error free, it is perhaps the most effective way to trade large volumes of securities. SEBI permits and regulates algorithmic trading activities both by retail investors and institutional traders.