SEBI proposes a regulatory framework for algo trading by retail investors

The algo trading system automatically monitors the livestock prices and initiates an order when the given criteria are met

The algo trading system automatically monitors the livestock prices and initiates an order when the given criteria are met
The algo trading system automatically monitors the livestock prices and initiates an order when the given criteria are met

SEBI floats consultation paper on algo trading for retail investors

The Stock Exchanges regulator Securities and Exchange Board of India (SEBI) on Thursday proposed a regulatory framework for algorithmic trading (algo trading) by retail investors to make such trading safe and prevent market manipulations. Algo trading refers to any order that is generated using automated execution logic. The algo trading system automatically monitors the livestock prices and initiates an order when the given criteria are met. This frees the trader from having to monitor livestock prices and initiate manual order placement.

PGurus published a series of reports in manipulations in algo trading by certain powerful brokers consortiums by manipulating the share prices.[1]

In its consultation paper, the regulator has proposed a framework for algo trading done by retail investors including the use of Application Programming Interface (API) access and automation of trades. Currently, exchanges are providing approval for the algo submitted by the broker. However, for the algos deployed by retail investors using APIs, neither exchanges nor brokers are able to identify if the particular trade emanating from the API link is an algo or a non-algo trade.

“This kind of unregulated/ unapproved algos pose a risk to the market and can be misused for systematic market manipulation as well as to lure the retail investors by guaranteeing them higher returns. The potential loss in case of failed algo strategy is huge for the retail investors,” SEBI said. Since these third-party algo providers/ vendors are unregulated, there is also no investor grievance redressal mechanism in place, it added.

Under the proposal, SEBI suggested that all orders emanating from an API should be treated as an algo order and be subject to control by a stockbroker and the APIs to carry out algo trading should be tagged with the unique algo ID provided by the stock exchange granting approval for the algo. The proposal, further, said that the broker needs to take the approval of all algos from the exchange. Each Algo strategy, whether used by broker or client, has to be approved by exchange and as is the current practice, each algo strategy has to be certified auditors.

Also, brokers will deploy suitable technological tools to ensure that appropriate checks are in place to prevent unauthorized altering or tweaking of algos. They need to have adequate checks in place so that the algo performs in a controlled manner. All algos developed by any entity have to run on the servers of the broker wherein, the broker has control of client orders, order confirmations, margin information among others.

SEBI suggested that brokers can either provide in-house algo strategies developed by an approved vendor or outsource the services of third-party algo providers/ vendors. Stockbrokers should be responsible for all algos emanating from its APIs and redressal of any investor disputes. The regulator said that obligations of stockbroker, investor and third party algo provider need to be separately defined. The stockbroker is responsible for assessing the suitability of investors prior to offering algo facility. “No recognition shall be given by the exchange to the third party algo provider/ vendor creating the algo,” SEBI said.

The regulator proposed that two-factor authentication should be built in every such system which provides access to an investor for any API/ algo trade. The Securities and Exchange Board of India has sought comments from the public till January 15 on the proposal. According to SEBI, there needs to be clarity on whether the services offered by the third-party algo providers are in the nature of investment advisory services as the nature of their services includes providing strategies to the investors based on research and analysis done by them.

Since there is limited understanding with respect to the nature of services provided by various algo providers, brokers may obtain from their clients, details of nature and type of services taken from algo providers along with a confirmation as to whether the said services are in the nature of investment advisory service, it added.


[1] India’s Algo trading scandal: a Tale of Two Exchanges and One Somnolent Regulator (SEBI)Apr 26, 2019,

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