SEBI proposes algo norms: retail to get self-developed algos registered, algo providers to get empanelled

SEBI proposes framework for algo trading by retail investors, seeks comments by Jan 3

Market regulator SEBI proposes empanelment and registration of algo providers with exchanges and asking tech-savvy retail investors to register the algos they have developed with the exchanges through their brokers.

In a consultation paper released on December 13, the market regulator has proposed a new framework to govern algorithmic trading by retail investors for ease of use with proper checks and balances. The draft circular proposing new rules is open for public feedback until January 3.

"The evolving nature of algo trading, particularly with the increasing demand for algo trading by retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in algo trading with proper checks and balances, to safeguard investor interest as well as integrity of the market," said the Securities and Exchange Board of India (SEBI) in the circular.

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On the empanelment of algo providers, the paper said, "For better oversight, any Algo provider, providing the facility to place algo orders with Brokers through API, shall require to be empaneled with Exchanges in a manner as stipulated by Exchanges."

Self-developed algo

The facility of algo trading shall be provided by the stock broker only after obtaining requisite permission of the stock exchange for each algo, said SEBI.

In the market, many tech savvy investors develop their own algos to place their trades. The regulator has suggested these traders get their algos registered with the exchanges with their help of their brokers. This algo can then be used by the family of these traders. Family for this purpose would mean self, spouse, dependent children and dependent parents, said the paper.

Role of the stock broker

The paper suggests that broker be treated as the principal and the algo provider, the agent, while using the API provided by the broker.

Also, all orders that are coming through the API provided by the broker at a particular frequency needs to be tagged as an algo order. The paper proposes: "All orders, above the specified order per second threshold, originating/flowing through Application Programming Interface (API) extended by brokers to their clients/service providers, shall be treated as algo orders and shall be tagged with a unique identifier provided by Stock Exchange. This is in addition to orders already tagged as Algo orders."

Brokers may be asked not to permit open APIs anymore and allow access only through unique vendor client specific API key and static IP whitelisted by broker to ensure identification and traceability of the vendor and end user.

The consultation paper suggests other checks to brokers:
*ensure that they have systems and procedures in place to detect/identify and categorize all orders above the specified threshold as algo orders;
* have OAuth (Open Authentication)3 based authentication only and all other authentication mechanisms shall be discontinued;
* authenticate access to API through two factor authentication;
* deal with empaneled algo providers only and handle all related complaints, as such algo providers are agents of such broker.