Leading online broking firms met up with stock exchanges on March 4 to propose guidelines for allowing access to the brokers’ Application Programming Interface (API) for retail players who trade using algorithmic strategies.
An algorithmic trading (algo trading) strategy is a set of rules or instructions that automatically generate buy and sell orders when the conditions are met. An API allows an individual to access brokers' trading platforms without manually logging in. In the above case, APIs provide the link between investors using such algos and the broker platform.
Sources who attended the meeting said that brokers have proposed a licensing and registration system for vendors who provide algorithmic strategies to retail traders, as well as retail investors who devise their own strategies. Among some well-established algorithmic trading vendors are Tradetron, Robotraders, Algotest, and Algobulls.
This is similar to the registration system for intermediaries who want to advise retail investors on their stock market investments. They have to undergo exams that test their technical knowledge to be able to get the license. A similar registration process should also extend to retail traders who devise their own algo trading strategies, and execute orders through their broker’s API.
Individuals proficient in understanding algo setups and segments should undergo specific exams and obtain licenses.
Also read: Sebi trying to regulate algo sellers with API norms, not hinder retail traders
Brokers will only partner with these registered algo vendors who will then provide algo strategies to the brokers’ clients. Each algo vendor would receive a unique algo ID, facilitating brokers and exchanges in tracking orders and attributing them to specific algos.
The brokers have also proposed that they will adopt the 'OAuth' mechanism, which is widely used in web and mobile applications to enable features like single sign-on, and social login, among others. The OAuth system will provide authentication to the algo vendor, whose platform is used by retail investors to fire algo trades.
This system improves security for the clients as it they don’t have to share their credentials with the algo platform.
At present, there are many instances of algo vendors using clients' credentials and logins, leading to data sharing outside of the broker's control. Some online brokers are already using this authentication system.
At the meeting it was decided that Industry Standards Forum (ISF), which consists of brokers' associations, will present the recommendations to the market regulator Sebi.
Also read: SEBI considering two models to regulate API based algo trading: sources
Last month, SEBI had proposed that all open APIs where the broker is unaware of the information about where it is being used by the client would be stopped on an immediate basis. Under the proposed regulations, the broker must be aware of the source of the order at all times.
It also proposed two models to regulate algo trading by retail investors.
In the first model, stock brokers will be required to get approval for their algo platforms just like other platforms. Brokers will also be need to take responsibility for their algos including but not limited to cyber security and data security.
Under the second model under consideration, algo platforms would be regulated and strategy providers could either share the exact strategy which would be executed using APIs or they could share the past performance only after it is verified by Performance Validation Agency (PVA).
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