Overview - Algo Trading in India
Algorithmic or algo trading has really revolutionized global financial markets because of its automated trade, millisecond trade execution and emotion-free trading. However, retail investors in India have been facing numerous hurdles in using the best algo trading software, while institutional investors had the upper hand on it for long. Therefore, the Securities and Exchange Board of India (SEBI) has now decided to open the algo trading for retail investors and traders also. Hence, it brought new regulations to ensure accessibility, fairness and transparency in algo trading for retail investors and traders.
As such, we have tried to break down the latest consultation paper of SEBI to tell you about its impact. We will explain how these rules could open the doors for retail traders and investors in trading. Moreover, we will also give you a glimpse of how the best algo trading strategies and platforms could assist traders in exploring the developing landscape in algo trading in India.
Why SEBI Intervened in algo trading
SEBI introduced Algo trading in India with its program of Direct Market Access (DMA) Facility. In the beginning, algo trading catered to proprietary trading firms, mutual funds, and hedge funds. However, in 2016, API-based trading became available in indian markets. With this, traders could use algo trading software to trade automatically in milliseconds.
Nevertheless, these algo trading software or APIs were not regulated by exchanges and were third-party-based. In this scenario, many fraudulent companies promised exponential profits with their algo trading software, which turned out to be fake. Many traders lost huge sums of money. Therefore, SEBI decided to step in to control such frauds.
SEBI mulled to take a crackdown on all illegal Algo trading platforms. Its proposal said that no trade executed through an API must be categorized as an Algo-generated order. Additionally, it must go through stricter oversight. SEBI imposed more tightened rules limiting brokers from partnering having illegal algo providers.
But all these strict actions did not curtail the increasing demand for Algo trading software and platforms. Therefore, SEBI decided to recognize such algo trading software, platform and apps so that traders can safely take part in trading efficiently and safely.
Key features of SEBI’s recent Consultation Paper
- Segmentation of Algorithms
SEBI has proposed to split trading algorithms into non-approved ones beyond its oversight and exchange-approved ones with an appeal to traders to use the best algo trading software to remain compliant to reduce risks.
- API-dependent Trading Rules
It has also mandated the tagging of all API orders in new API trading standards algo-generated while requiring brokers to monitor and register APIs to contain illegal market manipulation and algo trading.
- Responsibilities & roles of Stock Brokers
Brokers have to play a significant role in adherence to SEBI’s laws. Their responsibilities are :
- Approve SEBI-regulated algorithms only.
- Algo-generated trade reported must be transparently maintained.
- Prevent misguidance of investors with assured profit claims.
- Must not partner with illegal algo trading companies.
How does it profit Retail Investors?
The new regulations of SEBI might bring parity for retail investors by:
- Allowing fearless use of Algo trading platforms and use the best algo trading software.
- Making their algo trading safer because of regulated APIs and brokers.
- Making sure that trading algorithms get tested and then approved for transparency.
Creating Your Best Algo Trading Strategy
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Final Verdict
Hence, we can say that SEBI has put the right foot forward in the direction of safer and beneficial algo trading for all. It will make algo trading software safer and faster and legalize Indian stock markets.
By – Khalid Ahmed
Finance Content Writer (Algozini)
