Sebi tightens algo trading rules to plug gaps, boost investor protection

The Securities and Exchange Board of India (Sebi) has mandated the empanelment of algorithmic (algo) trading providers with stock exchanges and defined rules for using application programming interfaces (APIs). These new regulations aim to address regulatory gaps and enhance investor protection.

 

Algo trading is already prevalent in the Indian market among both institutional and retail investors. However, the existing regulations had several loopholes, posing risks to investors.

 

The Brokers’ Industry Standards Forum will formulate implementation standards before April 1, 2025, with the new norms becoming effective from August 1. Industry players said the new framework will make algos more accessible to a broader section of investors in a more transparent manner.

 

While algo providers will not be directly regulated by Sebi, the new guardrails will be implemented through exchanges, which will supervise algo trading and specify the criteria for empanelment.

 

Brokers will only be able to onboard algo trading providers that are empanelled with the exchanges. They will also need to obtain exchange approval and address grievances and monitor prohibited activities.

 

Under the new norms, open APIs will not be permitted. Access will be granted only through a unique vendor client to ensure identification and traceability.

 

Investors who develop their own algos will need to register with the exchange through their broker if they exceed the specified order-per-second threshold. These investors will be allowed to permit usage of their algos by immediate family members.

 

Additionally, “blackbox algos” — those that do not disclose their underlying logic — will need to register as Research Analysts with the market regulator. Any changes to the logic will require re-registration and maintenance of a detailed research report.

 

“Algo orders shall be tagged with a unique identifier provided by the exchange to establish an audit trail. Brokers must seek exchange approval for any modifications to approved algos,” noted Sebi.

 

Algo trading involves executing trades based on pre-programmed instructions linked to variables such as price movement and volumes. These tools use logic to automatically buy or sell securities based on their programming.

 

The exchanges will issue standard operating procedures (SOPs) for testing algos and will monitor the behaviour of all algo orders. Brokers have been directed to conduct due diligence before onboarding algo providers.

 

“Algo providers and brokers may share subscription charges and brokerage collected from clients. However, they must make complete and prominent disclosures of all charges to clients and ensure no conflict of interest arises,” said Sebi. 

TRACING NORMS

 

*  Algo providers must be empanelled with stock exchanges

 

*  Access will be granted only through a unique vendor client to ensure identification and traceability

 

*  ‘Blackbox algos’ must register as research analysts

 

*  Brokers to seek exchange approval for any modifications to approved algos

 

*  New norms will become effective from August 1