The Securities and Exchange Board of India (SEBI) has proposed a comprehensive framework to regulate algorithmic (algo) trading by retail investors, aiming to enhance market integrity and protect investor interests. This initiative addresses existing regulatory gaps and introduces stringent measures for stockbrokers and exchanges.

Key Provisions of the Proposed Framework

SEBI’s proposal mandates that stockbrokers can only permit algo trading through providers or platforms that are empanelled with stock exchanges. The exchanges will establish eligibility criteria for this empanelment. Retail investors developing their own algorithms must register them with exchanges via their brokers, and these registered algorithms can be utilized by the investor or their immediate family members.

Additionally, the proposal prohibits brokers from allowing open Application Programming Interfaces (APIs), which are commonly used in algo trading for functions like order placement and data retrieval. Brokers are required to engage only with empanelled algo providers and are responsible for addressing all related complaints. They must also implement measures to ensure the identification and traceability of both the vendor and the end-user.

Rationale Behind the Regulatory Measures

The surge in retail algo trading, particularly following the COVID-19 pandemic, has raised concerns about unregulated platforms and developers operating without oversight. This unregulated activity poses risks of market manipulation and potential exploitation of retail investors. SEBI’s proposed framework seeks to mitigate these risks by ensuring that all algo trading activities are conducted through approved and regulated channels, thereby enhancing transparency and accountability.

Industry Response and Implications

Industry stakeholders have largely welcomed SEBI’s proposals. Kunal Nandwani, co-founder and CEO of uTrade, noted the proliferation of unregulated algo platforms and developers, emphasizing that the new measures would bring such entities within regulatory purview, facilitating more effective oversight and redressal mechanisms.

By mandating the registration and approval of algorithms, SEBI aims to create a more structured environment for retail algo trading. This approach is expected to reduce instances of ‘misfire’ in the market and curb potential manipulative practices, thereby fostering a safer trading ecosystem for retail investors.

Next Steps and Public Consultation

SEBI has released a draft circular outlining these proposals and has invited public comments to ensure that the final regulations are comprehensive and effective. Stakeholders are encouraged to provide feedback, which will be considered before the implementation of the new framework.

Conclusion

SEBI’s initiative to regulate retail algo trading represents a significant step towards safeguarding investor interests and maintaining market integrity. By introducing stringent checks and balances, the regulator aims to create a transparent and accountable trading environment, addressing existing regulatory gaps and setting a precedent for robust oversight in the evolving landscape of algorithmic trading.