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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 traders
The 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