The Securities and Exchange Board of India (SEBI) is considering a proposal to extend algorithm-based trading (algo trading) to retail investors. Currently, this advanced trading strategy is predominantly utilized by institutional investors, offering them an edge through speed, precision, and the ability to capitalize on market inefficiencies.
On Friday, SEBI issued a draft circular detailing its plans to grant retail investors access to algo trading under stringent regulatory oversight. The regulator believes this initiative will empower individual investors and promote a level playing field in the financial markets. Public comments on the draft framework have been invited until January 3.
The draft proposes that brokers must obtain prior approval from stock exchanges for each algorithm they offer. Any modifications or updates to these approved algorithms would also require exchange clearance. To enhance transparency and facilitate regulatory scrutiny, SEBI suggests tagging all algo orders with a unique identifier issued by the exchange, creating a robust audit trail.
SEBI has emphasized the need for strong safeguards to ensure fair participation for retail investors. It proposes clearly defining the roles and responsibilities of all parties involved, including investors, brokers, algo providers, and market infrastructure institutions (MIIs). Only approved algorithms provided by registered brokers would be available to retail participants, ensuring compliance with the regulatory framework.
By addressing the growing demand for algo trading among retail investors, SEBI's initiative aims to foster innovation in the Indian financial markets while safeguarding the interests of all participants.
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