Market regulator Securities and Exchange Board of India (SEBI) has asked stockbrokers to refrain from making any reference to the past or expected future return or performance of the algorithm trading.

In a circular, SEBI says, "Stock Brokers who provide services relating to algorithmic trading shall not, directly or indirectly make any reference to the past or expected future return or performance of the algorithm and/or associate with any platform providing any reference to the past or expected future return or performance of the algorithm."

The market regulator says the circular is intended to protect the investors from falling prey to any kind of mis-selling being done by unregulated entities as well as to restrict the stockbrokers from associating with any unregulated entities.

SEBI found that some unregulated platforms offer algorithmic trading services or strategies to investors for automated execution of trades. "Such services and strategies are being marketed with 'claims' of high returns on investment. Further, 'ratings' have been assigned to the strategies, which could lead to investors being lured by such claims. This may amount to mis-selling of such services and strategies to investors," it says.

The market regulator has also asked stockbrokers to remove references to the past or expected future return or performance of the algorithm on their websites. Stockbrokers are also directed to disassociate within seven days from platforms providing such references on algorithmic trading.

SEBI has also asked stock exchanges to take necessary steps and put in place the necessary systems and procedures for implementing these provisions. Exchanges are also asked to make necessary amendments to their relevant by-laws, rules and regulations to implement its algorithm trading provisions.

Algos are offered through brokerage firms with the application programming interface (APIs) providing seamless connectivity between investors using such algos and the broker platform.

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?)