SEBI takes its investor protecting crusade into Elgo Trading Turf

The Securities and Exchange Board of India (SEBI) has unveiled a revised regulatory structure with the objective of promoting the safe participation of retail investors in algorithm trading.

The new guidelines mentioned in the SEBI circular released on Tuesday will require stockbrokers, exchanges and algorithm trading providers to implement strict risk management measures. The broker apps will be responsible for providing algorithm trading through the programming interface or API (software connecting application), and any ALGO provider or Fintech or seller will act as an agent when using the broker’s API.

This comes after the increasing demand for algo trading by individual investors, a method that has long been used by institutional traders to execute trades through automated logic-based systems. It wants to protect the interests of the step Retail investor Keeping the integrity of the market.

Sonam Srivastava, founder and fund manager of Right Research, said, “The aim of the new structure is to increase transparency, security and accountability in retail algorithm trading.” “Brokers need to act as major institutions, while allgo providers act as agents, SEBI ensures that broker takes responsibility for compliance and investor protection.”

The brokers will be responsible for ensuring that all algo trade are properly registered and monitored. They will also be tasked to ensure that the algo order has been tagged with unique identifiers provided for track and audit transactions by stock exchanges.

Additionally, brokers will need to implement increased safety measures, including ooute-based authentication and two-factor authentication, to prevent unauthorized access to the trading system.

Srivastava said, “Increased compliance on brokers, which should monitor API activity and handle complaints related to Elgo, increase operating costs,” for complex registration and overseas requirements. ,

Algo classification

The SEBI structure introduces a unique classification of algorithms in the “white-box” and “black-box” categories.

White-box algos, where logic is transparent and replication, is expected to be safe for investors. In contrast, Black-Box Algos, with an unknown argument, will require additional investigation, including registration and maintenance of detailed research reports as a research analyst.

Under the new guidelines, brokers will have to conduct the hard work required to ensure that only reliable vendors are integrated into their system.

Brokers should also ensure that no open API is used, and only specific sellers-client APIs are authorized. They will bear the responsibility of handling the complaints related to Algo trading, adding an additional layer of compliance that can increase operating costs.

The imperialism process for Algo providers will be maintained by exchanges, finalizing with specific criteria for eligibility.

Srivastava said that although algo providers will not be regulated directly by SEBI, they would need to register with exchanges and comply with tight monitoring requirements. “It can slow down innovation, especially for small fintech firms, as unclear approval procedures may delay the entry into the market.”

Black-box algorithm providers will need to present a detailed research report and seek re-approval from exchanges if they change the underlying argument of their algorithms.

While the aim of the new structure is to provide more protection for retail investors, guidelines can present challenges, especially for small players in the market. Experts believe that retail investors who develop their own algorithm will have to register with exchanges if they exceed the speed range of transaction, potentially discouraged involvement.

Overall, the emotion seems that while this regulatory approach effectively reduces the risks associated with retail algo trading, the implementation for small companies needs to be addressed to implementation challenges and potential obstacles.

The complete implementation of the guidelines is scheduled for August, in which SEBI has expected the stock exchanges to define specific operating standards by April.

Since brokers and algo providers work to accommodate their systems to meet these new requirements, SEBI aims to ensure that the risks of algorithm trading are reduced without innovation.

“Implementation timelines with the required complete compliance by August 2025 cannot provide enough time to brokers and elgo providers to upgrade their systems and to be compatible with new rules. These factors can make retail algo trading less accessible, especially for new entry, ”Srivastava said.