The Securities and Exchange Board of India (SEBI) has recently issued new guidelines to ensure the safe participation of retail investors in algorithmic trading (algo trading). This step aims to provide retail investors with access to algo trading while maintaining market integrity and protecting investor interests. SEBI announced this decision through a circular issued on February 4, 2025.
Let’s understand what this new SEBI circular is and what it means for retail investors.
What is Algo Trading?
Algo trading is an automated trading system that executes orders based on pre-defined rules and algorithms. This technology is widely popular among institutional investors, but now retail investors are also getting attracted to it. The key benefit of algo trading is that it facilitates timely and programmed order execution, eliminating the need for manual order placement.
Why Were These New Rules Needed?
SEBI issued comprehensive guidelines for algo trading on March 30, 2012, and has been making regular improvements since then. On December 9, 2021, SEBI released a discussion paper on ‘Algo Trading by Retail Investors’, which extensively covered API access and the automation of trades.
In FY24, 97% of FPI (Foreign Portfolio Investors) profits and 96% of proprietary trading profits in the F&O segment came from algo trading. This data highlights how impactful algo trading is in the market. SEBI’s new decision could open new opportunities for retail investors.
Key Features of the New Rules
Application Programming Interface (API) Usage
SEBI has established strict regulations for the use of APIs in algo trading. Under these rules, brokers must provide algo trading facilities via APIs, and algo providers must act as brokers’ agents. Additionally, all algo orders must be tagged with a unique identifier provided by the stock exchange. Moreover, retail investors developing their own algorithms must also register them with the exchange if they exceed the prescribed order threshold per second.
Role and Responsibilities of Brokers
Brokers must obtain prior approval from stock exchanges before offering algo trading services. All algo orders will be tagged with a unique identifier, and any modifications will require exchange approval. Brokers will also be responsible for handling investor complaints and monitoring API activity.
Registration and Monitoring of Algo Providers
Algo providers will not be directly regulated by SEBI but must register with stock exchanges for better oversight. Stock exchanges will define eligibility criteria for algo providers, and brokers will need to conduct due diligence before onboarding them.
Role of Stock Exchanges
Stock exchanges will be responsible for monitoring algo trading. They must establish a Standard Operating Procedure (SOP) for algo testing and track all algo orders. Exchanges must also maintain a kill switch to stop orders from specific algo IDs if needed.
Algorithm Classification
Algorithms will be categorised into two types:
White Box Algorithms – The logic is known to the user.
Black Box Algorithms – The logic is unknown to the user.
For black box algorithms, algo providers must register as research analysts and maintain a detailed research report for each algo.
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What’s Next?
The provisions of this circular will come into effect from August 1, 2025. The Brokers Industry Standards Forum must finalise execution guidelines by April 1, 2025. Stock exchanges have been directed to take the necessary steps to implement these provisions and notify brokers accordingly.
*This article is for informational purposes only. This is not investment advice.
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