MC Exclusive: Sebi trying to regulate algo sellers with API norms, not hinder retail traders

With the proposed regulations, Sebi is only trying to make these algo providers accountable, added the source.

The market regulator is only trying to stop algo sellers who promise unrealistic returns to retail traders with its move to regulate API-based algorithmic trading, according to a source who is working closely with the regulator.

The regulator is highly unlikely to interfere with retail traders who aren't selling algos to others, the insider added.

On February 11, a twitter post informed that the Securities and Exchange Board of India (Sebi) is considering regulating API-based algo trading.

Also read: SEBI considering two models to regulate API based algo trading: sources

According to it, the regulator may ask algo service providers to take an exam before being allowed to sell their product to retail traders, and will need to get their performance validated by an agency that is to be set up for this purpose. In August 2023, the regulator had proposed the setting up of a Performance Validation Agency (PVA) that will validate the claims made by an Sebi-registered entity.

Or, the regulator may ask the algo sellers to approach clients through brokerages, who will then be responsible for getting approval for the algo service and for the service delivery.

After this report was out, there was a lot of concern among algo traders about the regulator limiting their options. They were worried that, despite having a trading strategy they want to implement and knowing how to code it, they will have to approach a third party to execute it. The third party may be a person who has passed the exam or a brokerage.

But according to the insider Moneycontrol spoke to, the regulator isn't trying to stop retail traders from executing their own strategies but trying to protect retail traders from algo sellers who make tall claims.

"If you are implementing your trading strategy at your end and are not selling it, it is highly unlikely that Sebi will have a problem with that," said the insider to Moneycontrol.

"There are algo strategy sellers who come on Telegram or Twitter or other social-media channels and promise that using their strategy, retail traders can make big returns. These algo sellers are not regulated, even though they can be said to be giving investment advice," the inside source told Moneycontrol.

With the proposed regulations, Sebi is only trying to make these algo providers accountable, added the source.

People either automate their own strategy and connect it to their broking platform to fire the orders, or they buy third-party strategies and connect them to the broking platform. They can buy third-party strategies from various marketplaces.

It is the latter that the regulator is trying to crack down on, according to sources.

The question, therefore, is 'how would Sebi know if the person is connecting their own strategy or a strategy bought from a third-person'?

This will be difficult to do, according to a market veteran. "A retail trader can integrate a trading strategy through third-party platforms. The trading strategy can be his/her own or one that is bought from another person, how will the regulator know?"

A person who is involved in this process said that they are trying to figure that out.

Also read: Sebi proposes extending timeline for FPIs to make material-change disclosures

As of now, they are first trying to see how to validate an algo-seller's claims, how to regulate the sellers will come only after that.

"The exchange may ask algo-sellers to run it in the live environment and then validate their performance, and sessions are being conducted on certain days for trying this out. The sellers won't be allowed to present backtested data (because backtested data is often rigged by backtesting it in the most conducive trading environment)," said an insider.