The Securities and Exchange Board of India (SEBI) proposed a regulatory framework for retail investors participating in algorithmic trading.
Algo trading can be provided by brokers only after obtaining permission from the stock exchange for each algo, the draft circular said. All algo orders will be tagged with a unique identifier provided by the stock exchange to establish an audit trail and an exchange nod will be required for any change to the approved algos or systems used for algos.
Algo providers providing the facility to place algo orders with brokers through API will be required to be empanelled with exchanges, which will also specify the eligibility criteria for the algo providers.
Algo Classification
Algos will be categorised into two: execution or white box algos where logic is disclosed and replicable and black box algos where the logic is not known to the user and is not replicable. Algo providers for the latter will register as research analysts and maintain a research report for each such algo.
“There has been an increasing demand for algo trading. To facilitate the participation of retail investors in algo trading, 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 the integrity of the market,” a SEBI circular on Friday said.
For the purpose of provision of algo trading through APIs, brokers will be the principal, while any algo provider or fintech/vendor will act as its agent, while using the API provided by the broker.
All orders above a specified order per second threshold flowing through the Application Programming Interface (API) extended by brokers to their clients, will be treated as algo orders and tagged with a unique identifier provided by the stock exchange. This is in addition to orders already tagged as algo orders.
Algos developed by tech-savvy retail investors using programming knowledge, will be registered with the exchange through their broker. The same registered algo will be permitted to be used by such retail investors for their family, including spouse, dependent children and dependent parents.
Exchanges will post-trade monitoring of algorithmic orders and trades including putting in place a standard operating procedure (SOP) for testing of algos and using the kill switch for orders emanating from a particular algo id. Exchanges will supervise and inspect that brokers have the ability to distinguish between algo and non-algo orders.
“Retail investors will get access to the approved algos only from the registered brokers which will safeguard the interests of these investors. This presents opportunities for stock brokers to expand their customer base in a regulated environment,” said Ajay Garg – Director & CEO, SMC Global Securities.
