More Stories

Informist, Friday, Dec. 13, 2024

--SEBI issues draft circular on retail participation in algorithmic trading

--SEBI: Brokers to provide algorithm trading facility only after bourses nod 

--SEBI: Algorithmic orders to be tagged with unique identifier from bourses 

--SEBI invites comments on retail investor algorithmic trading by Jan 3 

MUMBAI – The Securities and Exchange Board of India Friday issued a draft circular on the participation of retail investors in algorithmic trading and called for comments and suggestions by Jan. 3. The market regulator has proposed that stockbrokers can provide algorithmic trading facilities to retail investors only after obtaining permission from stock exchanges for each algorithm. All algorithmic orders will have to be tagged with a unique identifier provided by the exchange to establish an audit trail, SEBI suggested. Brokers will have to seek approval from the exchange for any modification to the approved algorithms or systems used for algorithms, SEBI added.

All algorithmic orders, above the specified order per second threshold, operating through an application programming interface provided by brokers to their clients, shall be treated as algorithmic orders and tagged with a unique identifier provided by the stock exchange, SEBI said in the circular. The specified order per second threshold for categorisation as an algorithm will be evolved by the brokers' Industry Standards Forum under the aegis of the exchanges in consultation with SEBI.

Algorithms developed by retail investors themselves will also have to be registered with the exchanges through a broker, the regulator said in the draft circular. Such investors can use those algorithms only for their 'family'. Self, spouse, dependent children, and dependent parents will constitute 'family' for this purpose. All algorithm providers will have to be enrolled with the exchanges in accordance with the eligibility criteria stipulated by the exchanges, SEBI said.

SEBI has also proposed that the exchanges will have to post trade monitoring of algorithmic orders and trades and put in place a standard operating procedure for testing of the algorithms. The exchanges will continue to have the ability to use the kill switch for orders emanating from a particular algorithm identifier.

The exchanges will have to ensure that brokers have the ability to differentiate between algorithmic and non-algorithmic orders, SEBI said. The exchanges will specify the turnaround time to register certain types of algorithms on a fast-track basis while registering other types on a normal basis. For both these cases, turnaround time will be decided by the stock exchanges and mentioned in their standard operating procedures, SEBI said.

The algorithms will be categorised into execution or white box algorithms and black box algorithms, SEBI said. Execution algorithms are trading systems that execute orders based on transparent algorithms, where logic, decision-making process, and underlying rules are accessible and understandable to users. Black box algorithms are systems where users cannot see the internal workings and the rationale of an algorithm.

Black box algorithm providers will have to register as research analysts and maintain a research report for each algorithm, SEBI said. When the logic governing an algorithm is changed, the provider will have to register it as a fresh algorithm and maintain a research report for the new algorithm.

All the provisions mentioned will have to be followed for retail algorithm trade, along with the extant provisions related to algorithmic trade for institutional investors, SEBI said. At present, there are mechanisms such as direct market access facility through which institutional investors can trade through algorithms.

While the regulator said the provisions of the circular will be applicable from 2025, it did not specify a date. In 2021, SEBI had issued a discussion paper on 'Algorithmic Trading by Retail Investors', on the use of application programming interface access and automation of trades using the same.  End

Reported by Akshay V. Johnson

Edited by Rajeev Pai

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.