Market regulator Securities and Exchange Board of India (SEBI) has decided to extend the timeline for the formulation of implementation standards for the safer participation of retail investors in algorithmic (algo) trading by one month. In February, SEBI fixed the date as 1 April 2025 to release implementation standards for algo trading by retail investors.
In a release, SEBI says it received a representation from the stock exchanges requesting for an extension of timeline to finalise the implementation standards, as certain issues require further deliberation with the Brokers Industry Standards Forum (BISF). "Accordingly, to ensure smooth implementation of the framework, without any disruption to the market players and investors, it has been decided that the implementation standards shall come into effect from 1 May 2025. The provisions of the circular shall be applicable with effect from 1 August 2025."
SEBI also directed stock exchanges to take the necessary steps to implement the new rules, amend their regulations and ensure awareness among brokers.
Algorithmic trading, commonly known as algo trading, involves using automated systems to execute trade orders based on pre-set logic. While historically used by institutional investors, retail investors have increasingly sought access to this technology.
In response to growing demand and associated risks, in February this year, SEBI introduced stricter regulations for stockbrokers, algo-providers and market infrastructure institutions (MIIs).
A December 2024 consultation paper from SEBI proposed facilitating the participation of retail investors in algo trading which allows faster order execution and liquidity.
In a consultation paper, SEBI proposes to extend the existing regulatory framework, with additional safeguards, to facilitate the participation of retail investors in algo trading. "The evolving nature of algo trading, particularly with the increasing demand for algo trading by retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in algo trading with proper checks and balances."
"The evolving nature of algo trading, particularly with the increasing demand for algo trading by retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in algo trading with proper checks and balances. These provisions are expected to fill in the void for retail investors who want to trade using algos with adequate safeguards," it says.
The market regulator undertook extensive consultations with relevant stakeholders, including the intermediary advisory committee and BISF to extend the existing regulatory framework, with additional safeguards, to facilitate the participation of retail investors in algo trading.
SEBI defines algorithmic trading as any order generated using automated execution logic, where an open application programming interface (API) allows an individual to access brokers' trading platforms without logging in manually.
According to SEBI, its regulatory environment envisaged is aimed at spelling out the rights and responsibilities of the main stakeholders of the trading ecosystem like investors, stock brokers, algo providers and vendors and MIIs so that the retail investors can avail algo facilities with requisite safeguards.
As
Moneylife pointed out, as retail algos exploded, unscrupulous algo-writers began to lure newly minted investors with the promise of high returns. Many algo platforms falsely promise 'consistent and astronomical' returns. Some have back-testing of strategies that is 'curve-fitted' to mislead investors about returns; there are poor risk disclosures; there is no clarity on whether customer data (shared between brokers and algo-writers) is misused for proprietary trading and front-running a certain strategy deployment. (
Read: Who Is against SEBI's Move To Regulate Retail Algos? Are Their Fears Justified?)
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