SEBI Introduces New Framework for Safer Algo Trading for Investors

Moneylife Digital Team 05 February 2025

Investor Interest

Market regulator Securities and Exchange Board of India (SEBI) has announced a new regulatory framework to ensure the safer participation of retail investors in algorithmic (algo) trading. The new rules, outlined in a circular issued on 4 February 2025, aim to establish proper checks & balances, while maintaining market integrity.

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, SEBI has introduced stricter regulations for stockbrokers, algo-providers and market infrastructure institutions (MIIs).

Here are the Key Regulations Under the New Framework

Use of Application Programming Interface (APIs) for Algo Trading

SEBI says stock brokers will act as principals, while third-party algo providers will function as their agents.

All algo orders processed through brokers’ APIs must be tagged with unique identifiers provided by stock exchanges.

Retail investors developing their own algos must register them with the exchange if they exceed a specified order per second threshold.

Stock Brokers’ Responsibilities

Brokers must secure exchange approval for all algos and ensure proper tagging of orders.

They are responsible for addressing investor grievances related to algo trading.

They must implement strict security measures, including two-factor authentication for API access.

Empanelment of Algo Providers

While SEBI will not regulate algo providers directly, they must be empanelled with stock exchanges.

Brokers must conduct due diligence before onboarding algo providers.

Clear disclosure of charges and potential conflicts of interest is mandatory.

Stock Exchange Oversight

SEBI says exchanges will continue to supervise algo trading and ensure that brokers can differentiate between algo and non-algo orders.

A standard operating procedure (SOP) for testing and monitoring algo trades will be established.

Exchanges will retain the ability to trigger a ‘kill switch’ to halt trades in case of an algo malfunction.

Categorisation of Algos

Algos will be classified into ‘white box’ (execution algos with transparent logic) and ‘black box’ (non-transparent logic).

Black Box algo providers must register as research analysts (RA) and maintain detailed research reports.

According to the market regulator, the Broker’s Industry Standards Forum (BISF), in consultation with SEBI, will finalise detailed implementation guidelines by 1 April 2025. The new regulations will take 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.

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