Which algos will need to be registered? 10 highlights from the new operational norms

To access algo trading, clients will need to provide the broker with a static ID, which can be shared within a family.

After a delay of over a month, the operational guidelines for making algorithmic trading more accessible to retail traders have been released.

On May 5, the National Stock Exchange (NSE) issued a circular detailing the rules that must be followed by brokers, algo vendors and retail algo users.

Here are the highlights from the circular.

Also read: MC Exclusive: SEBI checkmates illegal algo providers with a tweak in final norms

1. What's the threshold per second (TOPS)?

Not all algos have to be registered. Only algos that cross this threshold or TOPS will need to be registered.

Market participants had been eagerly awaiting to see how high the regulator will set this threshold. According to the latest circular, TOPs  has been defined as 10 orders per second. Therefore, any algo that fires orders at higher frequencies or speeds will need to be first cleared by (registered with) the exchanges.
If the order frequency falls below this threshold, then the algo will not have to be registered. However, such orders, which are being fired via APIs (Application Programming Interface), will be tagged as algos for traceability. Such algos will also need to meet risk management criteria.

2. What if an unregistered algo crosses TOPS?
An unregistered algo crossing TOPS will be cut off from the trading system.
If the broker receives orders that exceed TOPS from such algos, the broker will reject, or not process such orders.
Every broker providing API connectivity to clients for algo trading should have the capability to effectively monitor or control the TOPS limit for algos not requiring registration.

3. How will algos be distributed?
Brokers may create and offer various algos to their clients, after registering these algos with the exchange.
Entities who want to independently provide algos will need to be empaneled with exchanges and the exchanges may assign an algo ID to each algo. Such algos can be used across brokers once registered. Algo providers can also enter into commercial arrangements with brokers, and share fees that a brokerage charges. Such an algo provider's technical platform can algo be integrated with the broker's trading systems, so that clients can log into the trading platform and fire orders that will be routed through the broker's trading system.
Retail traders can develop their own algos or hire tech vendors to code their algos, and then get their algos registered through the exchanges.

4. How can retail investors get algos registered?
If a retail investor wants to get an algo developed by him/her registered, the investor must provide the details to the broker who will forward the information to the relevant exchange. The exchange will register the algo and then the registration ID will be shared with the client.
Exchanges have been asked to formulate a simplified registration and compliance framework for orders up to the set threshold.

5. What if a retail investor wants to make a change to their algo?
He/she will need to approach their broker. In fact, it is the client's responsibility to inform the broker. Then, the broker will inform the exchange and get the registration updated.

6. Will algo orders be tracked?
Yes, brokers will need to ensure a sound audit trail for all algo orders that are fired whether through internet based-trading (IBT) systems or via security trading through wireless technology (STWT) or are fired from client API or from vendor API. Brokers have been asked to store the information for five years.

7. Can one client get access to multiple algos?
Yes. Multiple API keys, which is needed to connect to multiple algos, can be given to a client investor but all of them will need to be mapped either to a primary static IP or a secondary static IP.
Static IPs are a must for a client who wants to access algo trading facilities. The client can give one primary static IP to be mapped to their access, and give a secondary static IP that can be used to ensure connectivity.
In case of client-generated algos, the static IP shall be that of the client while, in case of algos generated via an empaneled algo provider, the static IP should be that of the vendor or the client. For the broker-generated apps, the static IP should be that of the broker or the client.

8. Can a static IP be shared?
Yes, if it is within a family.
The regulator has said that a static IP can be mapped only to one client at a time. But, static IPs can be shared between clients provided such clients belong to the same family.

9. Can static IPs be changed?
Yes, but not more than once a calendar week. If they need to be changed more times in this duration, due to some unforeseen circumstances, then they will need to reach out to their broker and the broker can get that done.

10. Who will monitor an algo vendor's compliance?
Brokers have been asked to do that. Brokers have been asked to carry out due diligence for the algo provider and make sure that the algo provider is not involved in any misconduct or in any violation of securities law. If the algo provider is seen to have violated laws or to have been involved in misconduct, the broker should immediately report such instances to the exchange(s).