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

According to sources, the SEBI is planning to expedite this and have a circular on this out by March-end.

In a move to regulate API based algorithmic trading, the Securities and Exchanges Board of India (SEBI) is considering two models along with several norms, according to a person who was part of the discussions. Renowned algo trader and strategy provider Dharmik Thakkar told Moneycontrol that he was part of the group that met the SEBI's senior management to discuss these norms.

Chaired by the SEBI Chairperson Madhabi Puri Buch, the meeting had representatives from market infrastructure institutions (MIIs), algo providers and stock brokers and discussed various issues around algorithmic trading.

According to Thakkar, the SEBI is planning to expedite this and have a circular on this out by March-end.

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Through the first model under consideration, stock brokers will be required to get approval for their algo platforms just like other platforms. Brokers will also be need to take all the 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).

As the SEBI enforces the regulations on algo trading, 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.

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Execution algos will be allowed if the client is aware of the strategy completely. Clients should have complete knowledge of what exactly is happening in the algos. Such information should be available in plain English for better understanding by any client.

The SEBI has also directed the National Stock Exchange to come up with a special team to act as PVAs and the NSE has also created a group that would give a proposal to the securities regulator over the criteria and strategies to to evaluate the performance of an algo strategy provider.

The SEBI has also guided for all algo strategy providers to stop showing back test results or past performance unless it is verified by the PVA. This PVA team might be from the exchange or it could be a third party as the SEBI is yet to make a final call on this.

Meanwhile, examples for algo strategy providers will also be rolled out and those that wish to provide algo services to clients must clear this exam. A circular on the same is expected before March-end and the PVA, exam syllabus and verification process are likely to be announced before June-end.

The minimum ticket size for algo strategy provider is expected to be 5 lakh instead of 50 lakh in PMS to factor in the presence of a huge chunk of retail investors involved in algo trading.