SEBI proposes that black-box algo providers register as RAs, keep research reports

The consultation paper has been floated to review the algo trading norms with increased interest in this mode of trading among retail investors.

Entities that sell black-box algorithms (algos) for trading may need to get registered as research analysts (RAs), according to a consultation paper issued by the market regulator on Friday.

Black-box algos are those that do not reveal their logic to the end users.

According to the paper issued by the Securities and Exchange Board of India (SEBI) on December 13, these entities may even have to maintain research reports. Public comments and suggestions have to be submitted by January 3, 2025.

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

The paper said, "Algos shall be categorized into two categories:

i. Algos where logic is disclosed and replicable i.e. Execution Algos or White box algos;

ii. Algos where the logic is not known to the user and is not replicable, i.e. Black box algos –

For algos in category (ii) of in the Black Box category, the Algo provider will be required to do the following:

Register as a Research Analyst and maintain a research report for each such Algo and confirm to the exchanges that such report has been maintained.

In case of any change in the logic governing the algo, register such algo as a fresh algo and maintain a research report for the new algo, and confirm to the exchanges that such report has been maintained

The consultation paper has been floated to review the algo trading norms with increased interest in this mode of trading among retail investors.

SEBI stated: "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. ."

The paper added, "These provisions are expected to fill in the void for retail investors who want to trade using algos with adequate safeguards."

The other suggestions include asking all algo providers to be empanelled by the exchanges and retail investors who develop their own algos to get these registered by the exchanges with the help of their brokers.