SEBI issues guidelines for safer participation of retail investors in Algorithmic trading.
Safer participation of retail investors in Algorithmic trading. Any order that is generated using automated execution logic is known as Algorithmic Trading. Generally, the features of algorithmic trading (‘algo trading’) include using a defined set of instructions in the form of algos to generate trading signals and placing orders.
In an effort to enhance market efficiency and transparency, SEBI had introduced Algorithmic Trading through Direct Market Access (DMA) Facility, which provided significant advantages such as faster order execution, reduced transaction costs, greater transparency, better audit trails and improved liquidity.
SEBI has issued the following regulatory framework to facilitate safer participation of retail investors in Algorithmic trading through brokers which includes use of Application Programming Interface (API), roles and responsibilities of Stock Brokers/Exchanges, empanelment and Registration of Algo Providers etc.
As per Framework, two categorization of Algos have been prescribed. First, Algos where logic is disclosed and replicable i.e. Execution Algos or White box Algos and second Algos where the logic is not known to the user and is not replicable, i.e. Black box Algos. For Black Box Algos, the algo provider shall register as a Research Analyst and maintain a detailed research report for each such algo and confirm to the exchanges that such report has been maintained. In case of any change in the logic governing the algo, register such algo as a fresh algo and maintain a detailed research.
Exchanges shall continue to be responsible for supervising algorithmic trading and putting in place a comprehensive Standard Operating Procedure (SOP) for testing of algos.
Download SEBI Circular on Algorithmic Trading Click Here >>
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