Hello everyone,
SEBI has recently released a draft circular to gather public comments on enabling retail investors to participate in algorithmic trading (algo trading). Till now, there hasn’t been any specific regulation regarding retail participation via algo and algo trading has traditionally been the domain of institutional investors. This proposal aims to bring it within reach of retail participants under a structured framework.
Here’s a summary of the key highlights:
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Expanded Access for Retail Investors
Retail investors may soon gain access to algo trading under a regulatory framework designed to ensure transparency, security, and fairness. -
Stakeholder Responsibilities
- Brokers: Will ensure that all algo trading activities are compliant, including registering algorithms and providing secure API access.
- Algo Providers: Must meet eligibility criteria and register with exchanges to offer their services.
- Exchanges: Will oversee compliance, provide unique identifiers for algorithms, and ensure audit trails.
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Algo Classification
- White-box Algos: Transparent and replicable, where the logic is disclosed to the user.
- Black-box Algos: Non-transparent algos requiring registration as Research Analysts and maintenance of detailed research reports.
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APIs and Security
APIs will require secure mechanisms like two-factor authentication, unique identifiers, and whitelisting to ensure traceability and prevent misuse - Only OAuth login mechanism to be allowed -
Implementation Timeline
The proposed framework is expected to roll out in 2025, subject to feedback and final approval from SEBI.
But there are a lot of small details in there too:
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Point 5 (II) c aimed at Individual Algo traders who build their own code
Algos developed by tech-savvy retail investors themselves, using programming knowledge, shall also be registered with the Exchange through their broker. Further, the same registered algo shall be permitted to be used by such retail investors for their family. ‘Family’ for this purpose would mean self, spouse, dependent children and dependent parents.
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Point 5 (II) d suggesting Open APIs to be replaced by closed APIs where verification of end use and user is important
Brokers shall not permit open APIs and allow access only through unique vendor client specific API key and static IP whitelisted by broker to ensure identification and traceability of the vendor and end user
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All Algos will have to be registered at Exchanges This means both category of algos: Individual use for algo traders (which will happen via the Broker) and Redistribution Algos - only permitted by Research Analysts where necessary reporting needs to be maintained and fresh algo approval needs to be taken.
These are just the broader points of the discussion paper. There are more such details outlines in this paper.
It is great to know that SEBI recognizes the growing interest among retail investors in leveraging algorithms to automate trading strategies. The circular builds on existing algo trading guidelines and proposes safeguards to ensure responsible usage and market stability.
This is in continuation to their initial discussion paper which was dated 9th December 2021 - here.
What This Means for Us
This is a draft circular, meaning no decisions have been finalized yet. SEBI is seeking input from stakeholders, including brokers, algo providers, and retail investors. As a regulated entity, we are committed to implementing whatever mode SEBI finalizes, ensuring full compliance and seamless integration for our users.
We would love to hear your thoughts on the same, so feel free to drop comment below with your thoughts on the proposed framework and any questions that you might have for us.
Here is the link to draft circular: Participation of Retail Investors in Algorithmic Trading - SEBI Draft Circular
