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Algo trading: Why Sebi has proposed regulatory framework

In a consultation paper, the Securities and Exchange Board of India (Sebi) said there is a need to create a regulatory framework for algo trading.

By: ENS Economic Bureau | Mumbai |
December 17, 2021 3:30:21 am
sebi employee investment normsSebi said bourses have to develop a system to ensure that only algos approved by the exchange and having unique algo ID provided by the exchange are being deployed. (File)

Sebi on December 9 proposed that all orders emanating from application programming interface (API) of stock brokers should be treated as algorithmic trading, or algo, raising concern that such restrictions will hamper the growth of algo trading in India.

The proposal

In a consultation paper, the Securities and Exchange Board of India (Sebi) said there is a need to create a regulatory framework for algo trading. All orders emanating from an API should be treated as an algo order and be subject to control by stock broker 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, as per Sebi. The stock broker needs to take approval of all algos from the exchange.

Sebi said bourses have to develop a system to ensure that only algos approved by the exchange and having unique algo ID provided by the exchange are being deployed. All algos developed by any entity have to run on the servers of broker. Two factor authentication should be built in every such system which provides access to an investor for any API/algo trade, the Sebi paper said.

The red flag

While services of third-party applications or algo providers and vendors are being increasingly used by investors (especially retail investors), such algos, based on APIs, are being deployed without taking requisite approvals from exchanges as per extant provisions. For algos deployed by retail investors using APIs, neither exchanges nor brokers are able to identify if a particular trade emanating from API link is an algo or a non-algo trade. Such unregulated and unapproved algos pose a risk to the market and can be misused for systematic manipulation.

Algo trading

Algo trading refers to orders generated at super speed using advanced mathematical models involving automated trade execution. Even a split-second faster access is considered capable of bringing huge gains to a trader. The algo runs on the broker’s systems and not on that of investors.

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