SEBI Introduces Stricter Regulations for Algo Trading to Enhance Investor Protection
The Securities and Exchange Board of India (SEBI) has introduced new regulations requiring algorithmic (algo) trading providers to be empanelled with stock exchanges while also setting guidelines for the use of application programming interfaces (APIs). These measures are aimed at addressing regulatory gaps and ensuring better investor protection.
Algo trading is already widely used in India by both institutional and retail investors. However, existing regulations had several loopholes that posed risks to market participants. The new framework seeks to bring greater transparency and accountability to the sector. The Brokers’ Industry Standards Forum has been tasked with formulating implementation standards by 1 April 2025, while the new norms will come into effect from 1 August. Industry experts believe that these measures will make algo trading more accessible to a wider investor base in a more structured and transparent manner.
Although SEBI will not regulate algo providers directly, the new guidelines will be enforced through stock exchanges. The exchanges will supervise algo trading and establish criteria for empanelment. Brokers will only be allowed to onboard algo providers that have been approved by the exchanges. They will also need to obtain exchange clearance for their algo services, monitor prohibited activities, and address investor grievances. Under the revised norms, open APIs will no longer be permitted. Instead, access will be granted only through a unique vendor client system to ensure proper identification and traceability. Investors who develop their own trading algorithms will be required to register with the exchange through their broker if their activity surpasses a specified order-per-second threshold. These investors will be allowed to share their algorithms only with immediate family members.
Additionally, algo providers using “blackbox algos”—which do not disclose their underlying logic—will need to register as Research Analysts with SEBI. Any modifications to these algorithms will require re-registration, along with the maintenance of a detailed research report outlining the changes. SEBI has also mandated that all algo orders be tagged with a unique identifier provided by the exchange to ensure a clear audit trail. Brokers will need to obtain exchange approval for any modifications to approved algos.
Algo trading involves executing buy or sell orders based on pre-programmed instructions linked to variables such as price movements and trading volumes. These automated tools analyse market conditions and make trading decisions accordingly. To ensure compliance, stock exchanges will issue standard operating procedures (SOPs) for testing algos and will closely monitor the behaviour of all algo orders. Brokers have been instructed to conduct thorough due diligence before onboarding any algo trading providers. SEBI has also introduced rules regarding fee structures. Algo providers and brokers will be allowed to share subscription charges and brokerage fees collected from clients. However, they must fully disclose all charges in a clear and prominent manner to prevent conflicts of interest. With these new measures, SEBI aims to create a more transparent, regulated, and investor-friendly algo trading ecosystem while minimising risks associated with unregulated algorithmic activities.
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