The Securities and Exchange Board of India has recently issued new regulations for algorithmic trading therefore to enhance the governance of this type of trading. In the new guidelines, the stock exchanges will be allowed to approve algorithmic trading firms and there are clear criteria for their usage. This change is expected to help in avoiding risks and increase in the level of transparency in the algorithmic trading which has recently gained popularity in India among the institutional and retail investors.
Algorithmic trading is the process of executing trades through pre-programmed algorithms. This allows traders to place orders at frequencies and speeds that are impossible for a human to achieve. Algo trading has been in the Indian markets for a number of years, but the previous rules were not very well thought out thus exposing investors to certain risks. The new framework adopted by SEBI is to ensure that the loopholes that had been identified are closed and the investors are protected as much as possible.
In the new rules it was stated that only empaneled algorithmic trading providers with the exchanges can be on-boarded by brokers to ensure that the algorithms used are standardized. Furthermore, the exchanges are to approve the brokers before using the algorithms, and also to watch for any prohibited activities and deal with investor complaints.
Another important aspect of the new rules is the restriction of open APIs. It is not possible for investors to use open APIs to link to the trading systems and execute trades. Instead, access will only be granted through unique vendor clients, which will help in tracing and identifying the different trading activities that are to be done. Those who develop their own algorithms must also register with the exchange and there are rules on the number of order per second.
These regulations are to take effect from the 1st of August, 2025, once the Industry Standards Forum of Brokers has finalized its standards by the 1st of April, 2025. This is in line with SEBI’s efforts to improve on the security and effectiveness of India’s financial markets.
