Algo Trading For Retail Investors: SEBI Shares Update - Details

The Securities and Exchange Board of India ( SEBI ) has released a draft framework aimed at enabling retail investors to access algorithmic trading (algo trading). 

Previously available primarily to institutional investors, algo trading offers advantages such as faster order execution, reduced transaction costs, and improved liquidity. Recognizing growing retail interest, SEBI’s initiative seeks to democratize this domain with stringent safeguards in place.

"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, to safeguard investor interest as well as integrity of the market," said the Securities and Exchange Board of India (SEBI) in the circular.

SEBI On Retail Investors 
The draft framework emphasizes the roles and responsibilities of all stakeholders, including investors, stock brokers, algo providers, and market infrastructure institutions (MIIs). Highlights include:

Broker Oversight: Stock brokers must seek exchange approval for algos, ensure audit trails via unique identifiers, and categorize all API orders above a certain threshold as algo orders.

Algo Providers: Providers must be empanelled with exchanges, adhere to eligibility criteria, and ensure compliance with SEBI regulations.

Retail Developer Empowerment: Tech-savvy investors creating their own algos can register them through their brokers. Registered algos may also be used by immediate family members.
To address potential risks, SEBI has mandated two-factor authentication and static IP whitelisting for API access. Exchanges will retain the authority to employ "kill switches" for malfunctioning algos and must supervise the distinction between algo and non-algo orders.

"All orders, above the specified order per second threshold, originating/flowing through Application Programming Interface (API) extended by brokers to their clients/service providers, shall be treated as algo orders and shall be tagged with a unique identifier provided by Stock Exchange. This is in addition to orders already tagged as Algo orders,’ as mentioned by SEBI. 

The framework distinguishes between "White Box" (execution algos with transparent logic) and "Black Box" algos, which operate on undisclosed logic. Black Box algos require registration as a research analyst and maintenance of comprehensive research reports.