The Securities and Exchange Board of India (SEBI) has made a panel providing algorithms (Elgo) trading with stock exchanges. It has also defined the rules for using the Application Programming Interface (API). The aim of the new rules is to remove regulatory flaws and increase the safety of investors.
Algo trading is already in circulation between institutional and retail investors in the Indian market. However, the current rules had many flaws that posed a risk for investors. The Brokers Industry Standards Forum will prepare the standard of implementation before April 1, 2025 and the new rules will be applicable from 1 August. Industry participants said that the new structure would make the algo more accessible to the larger sections of investors in a more transparent manner.
The SEBI will not directly regulate those providing algo trading. The new rules will be implemented through exchanges. Exchange Elgo will monitor trading and decide the criteria to join the panel.
Brokers will only be able to include those providing algo trading that will be in the panels of exchanges. They will also need to get approval from the exchange and resolve complaints as well as monitor the prohibited activities. Open APIs will not be allowed under the new rules. To ensure the ability to identify and detect, only one unique vendor will be provided access through client.
Investors who develop their own algo will have to register with the exchange through their broker if the orders are prescribed from the limit per second. These investors will be allowed to use their algo by the nearest family members.
Additionally, Blackbox Elgo, which does not state what the result came- will need to register with the market regulator as a research analyst. For any change in logic, registration and detailed research report will be required to retain.
Elgo trading involves the change in prices and completing the trade based on the instructions made already related to variables such as volumes. These tools use arguments to automatically buy or sell securities based on their programming.
The exchange for the testing of the elgo will release the standard operating process and all will monitor the behavior of the algo order. Before connecting those providing elgo trade, brokers have been instructed to examine the proper du diligation.
SEBI said that those providing algo trade and brokers can share membership fees and brokerage collected from customers. However, they will have to fully disclose all the charges to customers and ensure that there is no conflict of interests.