ARJAVA MEDIA
Securities and Exchange Board of India (SEBI) introduced Algorithmic Trading, known as algo trading through the Direct Market Access (DMA) Facility in 2008. It provided significant advantages like faster order execution, reduced transaction costs, greater transparency, better audit trails and improved liquidity. However, access to these facilities has been limited to institutional investors. As a regulator, SEBI started regulating this domain in 2012 to ensure better surveillance, risk management, and investor protection.
Over the years the demand for allowing this facility to retailers also emerged. That compelled SEBI to review and refine the regulatory framework so that retail investors can participate in algo trading with proper checks and balances. Accordingly, it undertook extensive consultations with relevant stakeholders including the Intermediary Advisory Committee and Brokers Industry Standards Forum to extend the existing regulatory framework, with additional safeguards, to facilitate the participation of retail investors in algo trading.
SEBI issued a draft circular on “Participation of retail investors in algorithmic trading” for public comments and suggestions to frame the right policy. SEBI issued a discussion paper on 09 December 2021 on “Algorithmic Trading by Retail Investors”, on the use of API access and automation of trades using the same. Further, SEBI had extensive discussions with the Exchanges, Brokers and Algo providers. The regulator now proposes a regulatory framework to facilitate the participation of retail investors in algorithmic trading through stock brokers.
Brokers can provide an algo trading facility to retail investors only after obtaining the requisite permission of the stock exchange for each algo. All algo shall be tagged with a unique identifier provided by the stock exchange to establish an audit trail. The brokers shall seek approval from the Exchange for any modification or change to the approved algos or systems used for algos. In this, the brokers shall be the principal while any algo provider, be it a fintech or other vendor shall act as its agent while using the API provided by the brokers.
Tech-savvy retail investors also can develop Algos, using their programming knowledge. Such investors must register with the exchange through their broker. In such cases, only the investor and his family – self, spouse, dependent children and dependent parents, can use the algo for the trading.
Brokers shall ensure that they have systems and procedures to detect and categorise all orders above the specified threshold as algo orders. Exchanges shall specify the eligibility criteria for the algo providers. Stock Exchanges will be responsible for supervising algorithmic trading while ensuring post-trade monitoring of algorithmic orders and trades including putting in place a SOP for testing of algos. The algos will have two categories, which are algos where logic is disclosed and replicable i.e. Execution Algos or White box algos and algos where the logic is not known to the user and is not replicable, i.e. Black box algos.
