February 05, 2025
In a move to enhance the safety and accessibility of algorithmic trading for retail investors, the Securities and Exchange Board of India (SEBI) has issued a new circular that outlines an updated regulatory framework. This directive, addresses the interest among retail investors to engage in algorithmic trading, traditionally dominated by institutional investors.
Background of Algorithmic Trading Regulations
Algorithmic trading, or Algo trading, involves orders generated through automated execution logic, providing significant advantages such as timed and programmed order execution. Until now, facilities like Direct Market Access have primarily served institutional participants. However, recognizing the increasing demand from retail investors, SEBI has been working to ensure that this technology is safely accessible to a broader audience.
New Regulatory Measures
The latest circular from SEBI, numbered SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/0000013, introduces several key regulations to facilitate safe participation in algo trading:
API Usage for Algo Trading:
Brokers will now act as the principal, with Algo Providers or fintech vendors serving as agents when using APIs provided by brokers for algo trading.
All algo orders must be tagged with a unique identifier provided by the stock exchange.
Registration and Usage of Algos:
Algos developed by tech-savvy retail investors must be registered with the exchange through their broker if they exceed a certain order-per-second threshold.
Registered algos can be used for trading by the investor and their immediate family, including spouse, dependent children, and dependent parents.
Development of Standards:
The Broker’s Industry Standards Forum, under the aegis of stock exchanges and in consultation with SEBI, will develop specified thresholds for categorizing software as an algo.
Enhanced Risk Management and Investor Protection
This structure is intended to safeguard the integrity of the market and the interests of investors by ensuring that retail investors can avail algo trading facilities with requisite safeguards.
Disclaimer: This is for informational purposes only and does not constitute legal, financial, or professional advice. Readers are advised to refer to official SEBI regulations for specific guidance tailored to their circumstances.
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