The Securities and Exchange Board of India (SEBI) has unveiled a draft framework to democratize algorithmic trading (algo trading), historically the domain of institutional investors, by granting access to retail investors. The initiative aims to empower retail traders with sophisticated trading tools while ensuring transparency and market security.
Key Highlights of the Proposed Framework:
Algo Trading Categories
- White Box Algos: Transparent systems where the trading logic and decision-making processes are fully disclosed. Retail investors can understand and replicate these strategies, making them ideal for those seeking clarity and control.
- Black Box Algos: Proprietary systems with undisclosed logic, typically used by institutions or algo providers. SEBI proposes stringent oversight, requiring creators to register as research analysts, maintain detailed research reports, and re-register any modifications.
Retail Access to Algos
- Retail investors can use approved algos through brokers, who must authenticate access via secure methods like two-factor authentication. API access will be restricted to authorized users through unique API keys and whitelisted IP addresses.
- Retail investors may also develop personal algos but must register them with exchanges. These self-developed systems can only be used by the investor and immediate family members.
Safeguards and Oversight
- Stock exchanges will monitor algo trades, ensure compliance, and implement “kill switch” mechanisms to halt malfunctioning algos.
- Brokers will categorize orders to distinguish between algo and non-algo trades, ensuring proper oversight and reporting.
Timeline and Public Consultation
SEBI has issued a draft circular for public comments, open until January 3, 2025. After incorporating feedback, the new framework is expected to be implemented later in 2025.
