SEBI Proposes New Rules for Algo Trading: Focus on Retail Participation and Algo Provider Oversight

The Securities and Exchange Board of India (SEBI) has introduced a draft framework aimed at regulating algorithmic (algo) trading, particularly for retail investors. Released on December 13, the consultation paper outlines measures to ensure proper checks, registration, and oversight of algo trading while making it accessible to retail investors. Public feedback on the proposed rules is open until January 3, 2025.

Key Highlights of SEBI’s Proposal

1. Algo Providers to Get Empaneled
   Algo providers facilitating trades through Application Programming Interfaces (APIs) will need to register with exchanges. This move seeks to improve monitoring and transparency in algo trading.
2. Registration of Self-Developed Algos
   • Tech-savvy retail investors developing their own algorithms will need to register them with exchanges through their brokers.
   • Once approved, these algos can be used by the investor’s family, which includes the individual, their spouse, dependent children, and dependent parents.
3. Broker’s Role as Principal
   • Brokers will act as the principal while algo providers function as agents.
   • Brokers must tag all algo orders with a unique identifier and ensure compliance with SEBI guidelines, including restrictions on open APIs.
4. Enhanced Security for APIs
   • SEBI proposes the use of OAuth-based authentication for API access.
   • Brokers will be required to authenticate access using two-factor authentication and whitelist static IPs.
5. Threshold for Algo Orders
   Any order exceeding a specified frequency will be classified as an algo order. Such orders must be tagged and identifiable to ensure traceability.

Objective Behind the Proposal

SEBI emphasized that the increasing popularity of algo trading among retail investors demands a robust framework to safeguard investor interests and market integrity. The proposed rules aim to strike a balance between enabling retail participation and maintaining stringent oversight.

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