Sebi readies settlement scheme for brokers in algo violation. Zerodha, 5Paisa, Motilal Oswal among 110 brokers served with show-cause notice

Sebi readies settlement scheme for brokers in algo violation. Zerodha, 5Paisa, Motilal Oswal among 110 brokers served with show-cause notice

India’s market regulator, the Securities and Exchange Board of India (SEBI), is set to roll out a settlement scheme for stock brokers who received show-cause notices over their association with unregulated algo platforms, according to sources familiar with the matter.

The scheme, which has been under consideration since the issuance of notices, will be presented to SEBI’s board on March 24 as an information memorandum and is expected to be notified soon after, one of the sources said. “The scheme is ready and will be placed before the board in the upcoming board meeting as an information memorandum and will be notified there after,” the source said. The regulator aims to resolve the matter swiftly rather than letting it escalate into a prolonged legal issue akin to the NSEL or illiquid options cases, another source added.

With the violations being considered more of an industry-wide practice than a major infraction, SEBI is keeping the settlement amount low, in the range of ₹1-2 lakh. Brokers seeking to avail of the scheme must apply to SEBI, and the window will likely remain open for three months, with the possibility of an extension based on response levels.

Last year, SEBI issued show-cause notices to more than 110 stock brokers, including major players like Zerodha, 5Paisa Capital, and Motilal Oswal Financial Services, after observing that unregulated platforms were offering algo-based trading strategies marketed with claims of assured returns. Platforms like Tradetron facilitated these trades by linking their algorithms to broker systems, despite SEBI’s explicit directives against such associations.

To safeguard investors, SEBI issued a statement in June 2022 and followed up with a circular in September, warning brokers against associating with unregulated platforms offering algorithmic trading strategies. The circular, titled “Performance/Return Claimed by Unregulated Platforms Offering Algorithmic Trading Strategies,” explicitly barred brokers from referencing past or expected returns of such strategies or collaborating with platforms making such claims. It also mandated brokers to sever ties with these platforms within seven days.

Despite the directive, SEBI found continued broker affiliations with these platforms, leading to an investigation and subsequent show-cause notices to over 110 brokers. Alongside the new settlement scheme, SEBI is also working on a standardized process for handling such cases to ensure transparency and a uniform enforcement approach.

Amid rising retail interest in algo trading and the proliferation of unregulated platforms, SEBI introduced fresh regulations on February 4, placing the onus on brokers as principals for algo trading executed via application programming interfaces (APIs). Under the new rules, algo providers and fintech vendors will act as agents of brokers and must be empanelled with stock exchanges. Brokers will be prohibited from onboarding non-empanelled algo providers.

SEBI did not immediately respond to an email from Moneycontrol seeking comment.