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The Securities and Exchange Board of India (SEBI) on Friday proposed to review the existing regulatory framework on algorithmic trading (algo trading) to facilitate participation of retail investors.
Algo trading refers to orders generated using automated execution logic. Such trading provides significant advantages of timed and programmed order execution.
“There has been an increasing demand for algo trading by retail investors. In order to facilitate participation of retail investors in algo trading, it has been decided to review and refine the existing regulatory framework to ensure proper checks and balances, to safeguard investor interest as well as integrity of the market,” SEBI said in a consultation paper.
At present, algo trading is limited to institutional investors, who have Direct Market Access (DMA) facility. DMA is used to describe clients / investor accessing the market directly using Computer to Computer Link (CTCL) software of a trading member and routing the orders through the trading member’s infrastructure.
The regulator has proposed to facilitate participation of retail investors in algorithmic trading through stock brokers who have obtained requisite permission of the stock exchange for each algo.
“All algo orders shall be tagged with a unique identifier provided by the stock exchange in order to establish audit trail and the broker shall seek approval from the Exchange for any modification or change to the approved algos or systems used for algos,” the draft paper said.
SEBI suggested that for the purpose of provision of algo trading through Application Programming Interface (API), brokers will be the principal while any algo provider or fintech/vendor will act as its agent, while using the API provided by the broker.
