InvestorQ : How does SEBI regulation of Algo Trading mean for investors?
Ishita Jain made post

How does SEBI regulation of Algo Trading mean for investors?

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Anjali Desai answered.
5 months ago
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Algo trading is the process of using pre-programmed trading instructions to execute trading orders at high speed in the financial market. Once the set instructions are triggered in the market, the trading software executes the orders set by the investor. However, SEBI has now regulated this process.

SEBI has released a draft regulatory framework that seeks to label all trading orders from an Application Programme Interface (API) as algo order. Furthermore, the framework mandates pre-approval from stock exchanges for algo-trading that would be tagged with a unique algo ID. Moreover, SEBI has directed all the stock exchanges to give recognition for algo trading only to brokers and no other third party or vendors.

The regulations come after SEBI noted that retail investors are increasingly using third-party algo software to execute algo trading, which is not approved by SEBI or the stock exchanges. Furthermore, SEBI seeks to mitigate frauds done by third-party algo services providers with the promise of ‘sure-fire profits’.

Here are some recommendations made by SEBI:
  • Only brokers can extend the service of algo trading and should have control over client orders, margin information, order confirmation, etc.
  • Each algo system should have a built-in two-factor authentication to provide access for any API or algo trade to the investors.
  • Stockbrokers should create a report on algo checks as a part of their annual system audit which is to be submitted to the stock exchanges.
  • SEBI has invited comments of retail investors on the consultation paper, which they can send by e-mail or through the post before 15 January 2022.
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