SEBI Circular on -Safer participation of retail investors in Algorithmic trading
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Date of Issue: 4-2-2025
Issuer: SEBI
Safer participation of retail investors in Algorithmic trading
Highlights of SEBI Circular dated February 4-2025
1. Introduction of Algorithmic Trading
· Algo trading offers significant advantages such as quicker and programmed order execution, especially for institutional investors.
· There is an increasing demand for algo trading from retail investors, which necessitates a review of the existing regulations to safeguard investor interests and maintain market integrity.
2. Objective of Regulatory Framework
· The new regulatory environment aims to clarify the roles and responsibilities of stakeholders, including investors, brokers, algo providers/vendors, and exchanges.
· The focus is to facilitate retail investors' participation in algo trading with appropriate safeguards in place.
3. Use of Application Programming Interface (API) for Algo Trading
· Brokers must act as the principal while algo providers or fintech vendors act as agents, using APIs provided by brokers.
· Algo orders via API must be tagged with a unique identifier to ensure traceability.
· Retail investors creating their own algorithms must register with the exchange if their algo crosses a specific order-per-second threshold. These algorithms can only be used for the investor’s family (self, spouse, dependent children, and parents).
· Brokers have to ensure that they maintain secure systems for identifying and tracking algo orders, including OAuth-based authentication, two-factor authentication, and dealing only with empaneled algo providers.
4. Brokers' Roles and Responsibilities
· Brokers must obtain permission from the exchange to offer algo trading and ensure each algo order is tagged with a unique identifier for audit purposes.
· Brokers are responsible for handling investor grievances and monitoring API usage to prevent prohibited activities.
5. Empanelment and Registration of Algo Providers
· Algo providers are not directly regulated by SEBI, but they must be empaneled by exchanges. Brokers are responsible for conducting due diligence before onboarding these providers.
· Brokers and algo providers may share subscription charges and brokerage fees but must make transparent disclosures to avoid conflicts of interest.
6. Exchanges' Oversight and Responsibilities
· Exchanges are tasked with supervising algorithmic trading, including:
o Establishing standard procedures for testing algos.
o Monitoring all algo orders and simulating their behavior.
o Enabling the use of a kill switch to stop orders from a specific algorithm.
o Ensuring brokers can distinguish between algo and non-algo orders.
o Implementing confidentiality measures for retail algo strategies, such as non-disclosure agreements and encrypted submissions.
· Exchanges must also define the empanelment process for algo providers.
7. Categorization of Algos
· Algos are categorized into two types:
o Execution Algos (White-box Algos): Logic is disclosed and replicable.
o Black-box Algos: Logic is not disclosed and not replicable. Algo providers must register as research analysts and maintain detailed research reports for each black-box algorithm.
· If the logic of a black-box algo changes, it must be re-registered.
8. Implementation Schedule
· Implementation standards are to be finalized by the Broker’s Industry Standards Forum by April 1, 2025.
· The provisions of this circular will come into effect on August 1, 2025.
9. Compliance and Communication
· Exchanges are directed to ensure necessary systems are in place to implement these regulations.
· Amendments to relevant rules and regulations will be made, and brokers will be informed accordingly.
10. Legal Authority
· The circular is issued under the powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992, and aims to protect investor interests, promote development, and regulate the securities market.
Conclusion
The revised framework enhances the oversight and security of algorithmic trading, especially for retail investors, by defining clear responsibilities for brokers, exchanges, and algo providers. The measures aim to ensure that retail investors can participate safely while minimizing market risks. The implementation will be closely monitored with a focus on secure and transparent operations.
In case of any clarification or assistance required in the implementation of this circular, you may contact
Kaushik Jethwa - kau...@secmark.in / 9870210171
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