SEBI Implements Regulations for Algo Trading in India
Algorithmic trading, also known as algo trading, involves the execution of trades using computer programs that can place orders at rapid speeds, surpassing human capabilities. While algo trading is widely used by both institutional and retail investors in India, concerns have been raised about market fairness and security due to existing regulatory loopholes.
Some important highlights from the new rules established by the Securities and Exchange Board of India (SEBI) include the requirement for stock exchanges to accredit algo trading providers to ensure that only authorized entities can offer these services. Brokers are only allowed to engage with accredited algo providers, and they must secure approval from the exchanges and oversee compliance.
An essential aspect of these regulations is the prohibition of open Application Programming Interfaces (APIs), which ensures that access to algo trading services is granted exclusively through a distinct vendor-client system to enable traceability. Investors who create their own algorithms are mandated to register with the exchanges through their brokers and adhere to a specified order-per-second limit. Furthermore, self-developed algorithms can only be shared with immediate family members under stringent guidelines.
Moreover, ‘Blackbox algos,’ which are algorithms with undisclosed logic, are required to register as Research Analysts with SEBI before being deployed. The Brokers’ Industry Standards Forum is expected to create a set of standards for algo trading by April 1, 2025, with full implementation scheduled for August 1, 2025.
These regulatory changes hold immense significance as they aim to enhance transparency, accountability, and security in the algo trading landscape in India. By ensuring that only verified entities and individuals are involved in providing and using algo trading services, SEBI’s initiative seeks to safeguard market integrity and protect the interests of investors. The implementation of these rules will play a crucial role in fostering a fair and ethical trading environment in the country’s financial markets.
