SEBI announces new ‘algo trading’ rules: Report

The Securities and Exchange Board of India (SEBI) has mandated stock exchanges to empanel algorithmic trading providers and has also defined rules for using application programming interfaces (APIs), according to a Business Standard report.

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What is algorithmic trading?

Algorithmic trading, also known as algo trading, is a method of executing trading orders by providing a predefined set of rules to a computer program.

This helps in placing share orders at a speed and frequency not possible for human traders.

Algo trading is already prevalent in India among both institutional as well as retail investors. However, existing regulations had several loopholes, posing risks to investors, according to a Business Standard report.

As a result, The Brokers’ Industry Standards Forum will formulate algo trading standards before April 1, 2025, and they will become effective from August 1.

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Details of the algorithmic trading rules

The new guardrails will be implemented through the exchanges. This also includes criteria for empanelment.

Brokers will thus, only be able to onboard algo trading providers that are empaneled with the exchanges. Apart from this, they also have to obtain exchange approval, address grievances and even monitor prohibited activities.

Open APIs won’t be permitted with access only being granted through a unique vendor client to ensure identification and traceability, according to the report.

Investors who develop their algos have to register with the exchange through their brokers a specified order-per-second threshold.

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These investors are also allowed to permit usage of their algos by immediate family members.

Apart from this, ‘blackbox algos’ which are those that don’t disclose their underlying logic need to register as Research Analysts with SEBI.