SEBI expands algo trading to retail investors, new norms to take effect from Aug 1
SEBI on Tuesday issued a tighter framework for algorithm trading to protect retail investors through checks and balances. It has tasked the Brokers’ Industry Standards Forum to formulate implementation standards by April 1, following which the new norms will become effective from August 1.
The move is aimed at bridging regulatory gaps for retail investors who want to use algos and SEBI’s Direct Market Access (DMA) facility for faster order execution and improved liquidity—which was only being used by institutional investors.
Algo trading uses predefined computer programs to execute trades based on changes in market prices and volumes.
Empanelled algos
Under the regulations, brokers can onboard only those algo-trading providers empanelled with the stock exchanges, who will supervise algo trading, specify the criteria for empanelment and verify use of defined Application Programming Interfaces (APIs).
“Algos, developed by tech-savvy retail investors themselves, using programming knowledge, shall also be registered with the exchange, through their broker, only if they cross the specified order per second threshold,” SEBI said in a circular.
The regulator has also mandated categorising algos into two distinct types – replicable and non-replicable algos, to be called white box and black box algos, respectively. All algo orders will be tagged with a unique identifier to establish an audit trail, it said.
The framework outlines the roles and responsibilities of stock brokers, stock exchanges, algo providers/ vendors, market infrastructure institutions and investors.
