The Securities and Exchange Board of India (SEBI) released a consultation paper on algorithmic trading by retail investors.Under algorithmic or algo trading, computers monitor live stock prices and initiate an order when given criteria are met.
Comments have been invited on the following key issues:
▪ Algo trading by retail investors: Under the current framework, the facility of algo trading may be provided by stock brokers after obtaining permission from the stock exchange. SEBI observed that many brokers are providing Application Programming Interface (API) access to their clients, which establishes an online connection between the broker and the client. API access allows the investors to use third-party applications to analyse market data or test an investment strategy. These APIs are used by investors for automating their trades.
▪ It has been observed that brokers are unable to differentiate between an algo and non-algo order emanating from an API. Third party applications are being used by investors and such algos are being deployed without taking prior approvals from the exchanges. SEBI’s internal working group has proposed that all orders emanating from an API should be treated as an algo order and should be subject to control by the stock broker. Stock exchanges have to ensure that only those algos which are approved by them and have a unique algo identification provided by them are being deployed. Stock brokers can either provide in-house algo strategies or outsource the services to a third party algo provider/vendor. The broker will be responsible for all algos emanating from its APIs and redressal of investor disputes.
▪ Third party algo providers: SEBI observed that there needs to be clarity on whether services offered by third party algo providers or vendors are investment advisory services. As there is limited understanding of the nature of the services provided by these parties, it has been proposed that brokers may obtain the details of nature and type of services being taken from algo providers, from their clients.
Comments on the paper have been invited by January 15, 2022.
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