SEBI on Tuesday opened the doors of Algo trading for retail investors, which has come after a long wait. Algo trading was only for institutional investors until this big announcement by SEBI. However, the watchdog has set certain rules and regulations to safeguard the interest of retail investors who are willing to take part in algorithmic trading.
Craze for Algo Trading
The hype or the craze around Algo Trading is due to the faster order execution that it offers to the investors and the boost in the liquidity in the market. Until now, only institutional traders were allowed to take part and benefit from the programmed execution of orders, orders which can be timed with the algo trading software. Now, retail traders can also benefit from this process. This new rule will be applicable from 1 August 2025.
What does it bring to the table?
With the new rules applicable from August onwards, the retail investors will have access to a set of approved algorithms but this has to be only from brokerage houses which are registered. SEBI chalked out the roles and responsibilities of the stock brokers and the stock exchanges, and other participants to benefit the retail investors and to maintain the market’s integrity.
Each algo has to be approved by the stock exchange, and then only the stock brokerage house can give access to the same to the retail traders. For the approval from the exchanges, all the newly developed algos, or the existing ones for which the approval has been sought, need to go through an audit trail and after all checks, they can be approved and given access.
The brokerage houses have all the responsibilities of tackling the grievances of the investors and also, they have the sole responsibility of monitoring the APIs for any restricted actions. For this, SEBI has mandated that any brokerage houses which want to provide the facility need to be empanelled with stock exchange/s
Interesting Data
- 97% of the FPI profits during FY24 was via algo trading
- 96% of the proprietary traders’ profit was also from algo trading
How will it work?
Here brokerage houses offering algo trading via APIs will be regarded as the principal and any fintech company, or vendor, who is providing the Algo will be regarded as the agent.
Even if the algos are built by the retail investors using programming knowledge, they need to register the same with the stock exchange via their brokers however, this is only when the order per second threshold is crossed.
Again the brokerage houses must differentiate between the algo and non-algo trading orders to keep the retail investors’ interest safe. The stock exchanges, on the other hand, will be using comprehensive Standard Operating Procedures (SOP) for testing the algos.
The stock exchanges need to keep surveillance on algo orders and track the behaviour of all algos, even during simulation testing and they will have the power to negate any order from any particular ID which they feel is not the right fit. Now the exchanges have been asked to share a turnaround time for registration of algos of certain types, and also for the normal ones and then mentioned the same in the SOPs which need to be disclosed on the brokerage houses’ website.
Wrapping up
With this new announcement, markets are expected to be more liquid, and algo trading offers fast execution of orders so that retail investors can benefit from the same as all institutional investors.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.