Sebi allows retailers into algo trading from Aug with strict track & trace rules

In a circular issued on Tuesday, the Securities and Exchange Board of India (SEBI) said brokers can provide algo trading facility to retail investors only after obtaining requisite permission from stock exchanges for each algorithm.
SEBI proposes expanding algo trading to retail investors, seeks public comments
SEBI proposes expanding algo trading to retail investors, seeks public comments
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MUMBAI: The markets watchdog Sebi has allowed retail investors to trade using algorithmic or algo trading putting in place stricter norms that demand strict track and  trace rules to protect them from mishaps amid rising demand. Algo trading provides advantages of faster order execution and improved liquidity.

In a circular issued on Tuesday, the Securities and Exchange Board of India (SEBI) said brokers can provide algo trading facility to retail investors only after obtaining requisite permission from stock exchanges for each algorithm. It further said algos developed by retail investors will also need to be registered if they cross the specified order per second threshold.

"To facilitate safer participation of retail investors in algo trading, with stock brokers and stock exchanges playing the required roles in risk management, it has been decided to review and refine the existing regulatory framework to ensure proper checks and balances, to safeguard investor interest as well as integrity of the market," the circular said, adding the facility will be applicable from August 1.

It further said each algo order will be tagged with a unique identifier to establish an audit trail and providers should empanel with stock exchanges.

A study published by the regulator last September showed that during fiscal 2024, algorithmic trading accounted for 97% of foreign investors' and 96% of proprietary traders' profits in futures and options.

At present, only institutional investors are allowed in algo trading, which provides significant advantages of timed and programmed order execution.

SEBI has also come out with a regulatory framework aimed at spelling out the rights and responsibilities of the main stakeholders of the trading ecosystem such as investors, brokers, algo providers/vendors and market infrastructure institutions (MIIs) so that the retail investors can avail of algo facilities with requisite safeguards.

Under the framework, retail investors will get access to the approved algos only from the registered brokers, which will safeguard the interests of these investors.

Sebi said algo trading facility will be provided by brokers only after obtaining requisite permission from the exchanges for each algo. "All algo orders shall be tagged with a unique identifier provided by the exchange in order to establish audit trail and the broker shall seek approval from the exchange for any modification or change to the approved algos," it added.

Brokers will be solely responsible for handling investor grievances related to algo trading and the monitoring of APIs for prohibited activities. For better oversight, any algo provider, providing the facility to place algo orders with brokers, through Application Programming Interfaces or APIs, will require to be empanelled with exchanges.

For providing algo trading through APIs, brokers will be the principal, while any algo provider or fintech/vendor would act as its agent while using the API provided by the broker.

Algos developed by tech-savvy retail investors themselves, using programming knowledge, will also be registered with exchanges, through their brokers, only if they cross the specified order per second threshold stock exchange," it added.

Sebi said exchanges will be responsible for supervising algorithmic trading and inspecting that brokers have the ability to distinguish between algo and non-algo orders.

Exchanges will continue to be responsible for supervising algo trading while putting in place a comprehensive standard operating procedure for testing of algos. They will also be accountable for keeping surveillance on all algo orders and monitoring their behaviour at all times including simulation testing of all algos, will continue to have the ability to use the kill switch for orders emanating from a particular algo ID.

"Exchanges shall specify the turnaround time to register certain types of algos on a fast track basis while registering other types of algos on a normal basis. For both these scenarios, the turnaround time shall be decided by exchanges and mentioned in their standard operating procedures, disclosed on their website," Sebi said.

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