The market regulator, the Securities and Exchange Board of India, on Tuesday came out with guardrails around how retail investors can access algo trading.
The provisions involve a triangular sort of relationship between the stock exchanges, brokers, and the algo providers. At first the brokers will act as the principal and the algo providers will be like their agents. Meanwhile, the stock exchanges will provide a unique identifier for all the orders generated through these algos.
In case a retail investor is working on their own algo and using it eventually, they will have to get it registered as well in case they exceed the specified order per threshold. However, they will only be able to let their immediate family members use that algo.
In a system that will not be regulated by the SEBI directly, the stock exchanges will have the algo providers registered with them. Post this, only the registered providers will be onboarded by the brokers, and they will have the responsibility to oversee any complaints related to algos.
The brokerages will have to come up with a two-factor authentication and API control access for the providers.
SEBI has categorised algos into two types: white-box (execution algos, where the logic is transparent) and black-box (where the logic is hidden from users). Black-box algo providers must register as research analysts and maintain detailed research reports.
The new framework will be implemented in phases, with industry standards finalised by April 1, 2025, and full implementation starting from August 1, 2025. Stock exchanges must ensure compliance by amending their rules and informing brokers.
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