The Securities and Exchange Board of India (SEBI) has paved the way for retail investors to participate in algorithmic trading (algo trading), offering faster order execution and enhanced market liquidity. Until now, only institutional investors were permitted to engage in algo trading.CompanyValueChange%Change”In order to facilitate safer participation of retail investors in algo trading, with stock brokers and stock exchanges playing the required roles in risk management, 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 its circular.Here are the key highlights of SEBI’s new algo trading framework:
Retail investor participation: Retail traders can now access approved algos only through registered brokers, ensuring security and transparency.Regulatory safeguards: SEBI has introduced a structured regulatory framework defining the roles and responsibilities of investors, brokers, algo providers/vendors, and Market Infrastructure Institutions (MIIs).Broker responsibility:—Brokers must obtain stock exchange approval for each algo before offering it to retail investors.—Any modifications or updates to approved algos must be pre-approved by the exchange.—Brokers will be fully responsible for handling investor grievances and ensuring API monitoring to prevent prohibited activities.
Unique algo identifiers: All algo orders must be tagged with a unique identifier provided by the exchange to ensure an audit trail and compliance.Exchange oversight and compliance:—Exchanges will supervise algo trading, ensuring brokers can differentiate between algo and non-algo orders.—A Standard Operating Procedure (SOP) will be established for algo testing, monitoring, and simulation to prevent market manipulation.—Exchanges retain the authority to use a kill switch for specific algo IDs in case of irregularities.Fast-track registration for certain algos: Exchanges will set turnaround time (TAT) for registering execution algos on a fast-track basis, while others will undergo normal approval procedures.Impact on retail tradersThe move democratises algo trading, allowing tech-savvy retail investors to leverage automated strategies under a regulated framework. However, self-developed algos will require exchange registration if they exceed the specified order-per-second threshold.With 97% of FPI profits and 96% of proprietary trading profits in the F&O segment coming from algo trading in FY24, SEBI’s decision could unlock new opportunities for retail traders while maintaining market integrity.Implementation date: The new framework will take effect from August 1, 2025.First Published: Feb 4, 2025 7:29 PM IST
