The Securities and Exchange Board of India (Sebi) said in a circular on Feb 4 that it has introduced measures and controls around algorithmic trading (algo trading). This move smoothens the way for retail investors, keen on participating in algo trading, which boosts timely and programmed order execution.
Also, to clarify the rights, roles, and responsibilities of the main stakeholders of the trading ecosystem such as brokers, investors, algo providers, vendors, and market infrastructure institutions (MIIs), Sebi has come out with a regulatory framework. This move would help retail investors to avail algo facilities with the necessary precautions. This would be applicable from August 1 onwards.
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According to the Sebi circular, “To facilitate safer participation of retail investors in algo trading, with stockbrokers and stock exchanges playing the required roles in risk management, it has been decided to review and refine the existing regulatory framework to ensure proper checks and balances and safeguard investor interest as well as the integrity of the market.”
The Sebi circular also mentioned that retail investors could only access the approved algos from registered brokers, which would protect their interests.
The stockbroker would have access to algo trading, only after the much-needed permission from the stock exchange for each algo. “The facility of algo trading shall be provided by the broker only after obtaining requisite permission of the stock exchange for each algo. All algo orders shall be tagged with a unique identifier provided by the exchange to establish an audit trail and the broker shall seek approval from the exchange for any modification or change to the approved algos. Brokers shall be solely responsible for handling investor grievances related to algo trading and the monitoring of Application Programming Interfaces (APIs) for prohibited activities,” says the Sebi circular.
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For handling investor grievances related to algo trading, the brokers will be solely responsible. They would also take care of the monitoring of APIs for prohibited activities. “While algo providers shall not be regulated by Sebi, for better oversight, any algo provider, providing the facility to place algo orders with Brokers through API, shall require to be empanelled with Exchanges in a manner as stipulated by Exchanges,” adds Sebi circular.
The exchanges need to specify the empanelment criteria for the algo providers. The broker must do the necessary due diligence before onboarding an empanelled algo provider on its platform. Algo providers and brokers may share the subscription charges and brokerage collected from the client. However, the client must be prominently and completely informed of all charges. The broker must also ensure that such arrangements do not result in any conflict of interest.
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The exchanges need to continue to be responsible for supervising algorithmic trading while ensuring the following: i. putting in place a comprehensive Standard Operating Procedure (SOP) for testing of algos; ii. surveillance on all algo orders and monitoring their behaviour at all times including simulation testing of all algos; iii. continue to have the ability to use the kill switch for orders emanating from a particular algo id (the kill switch is an emergency function and the last level of defence against any algorithm malfunction); iv. defining the roles and responsibilities of brokers; and v. defining the roles, criteria, and process of empanelment of algo providers. Exchanges must also supervise/inspect that brokers can distinguish between algo and non-algo orders.
