MUMBAI: The Securities and Exchange Board of India (Sebi) has proposed a framework to facilitate retail investors’ participation in algorithmic trading (algo trading), a domain traditionally dominated by institutional investors.
This move aims to democratise access to faster order execution, enhanced liquidity, and reduced transaction costs while ensuring adequate safeguards are in place.
The introduction of algorithmic trading for retail investors in India could significantly impact market dynamics. By enabling retail participation in algo trading, the move may enhance liquidity and efficiency in the market, narrowing bid-ask spreads and fostering a more competitive trading environment.
A market analyst at a leading brokerage office in Kochi told businessbenchmark.news that algo trading raises concerns about potential market volatility, as increased algo-driven activity might amplify rapid price movements.
“Regulators and exchanges will need to ensure robust safeguards to prevent risks such as misuse or market manipulation, while also educating retail investors on the complexities of algorithmic trading to ensure informed participation,” he added.
Why retail excluded
Algo trading was introduced in India through the Direct Market Access (DMA) facility, offering advantages such as reduced costs, better audit trails, and improved market efficiency. However, access was limited to institutional players due to concerns over market integrity, risks of misuse, and the need for advanced infrastructure and expertise, which were deemed challenging for retail investors to meet.
New proposal
In its consultation paper, Sebi proposed extending the existing regulatory framework with additional safeguards tailored for retail participation. The key aspects include:
Defined rights and responsibilities: Establishing clear roles for stakeholders, including retail investors, stockbrokers, algo providers, and Market Infrastructure Institutions (MIIs).
Broker oversight: Brokers would act as principals, ensuring that algo providers/vendors using Application Programming Interfaces (APIs) adhere to guidelines.
Approval process: Every algo would require stock exchange approval, with unique identifiers tagging algo orders to enable audit trails.
Empanelment of algo providers: Algo providers would need to meet eligibility criteria set by exchanges and undergo periodic supervision.
Fast-track registration: Exchanges may allow certain types of algos, such as execution algos, to be registered on a fast-track basis with turnaround times specified in their SOPs.
Where India stands
Globally, developed markets like the US and the UK have facilitated retail algo trading for years, supported by robust regulatory frameworks and advanced market infrastructures. For instance, In the US, retail traders can use algo strategies via platforms like Interactive Brokers and TradeStation, with brokers offering APIs and risk management systems.
In Europe, exchanges such as Euronext and London Stock Exchange (LSE) allow algo trading with stringent compliance measures.
Some emerging markets, like Brazil and South Africa, have also begun allowing retail algo trading, leveraging lessons from developed economies.
Benefits and challenges
Sebi’s move could bridge the gap between institutional and retail market participants, enhancing market liquidity and efficiency. However, it also raises challenges like managing operational risks, ensuring retail traders are well-informed, and preventing manipulative practices such as spoofing and layering.
Sebi’s initiative reflects the growing demand for algo trading among retail investors and a need to align with global standards. If implemented successfully, it could transform India’s trading ecosystem, empowering retail investors while maintaining market integrity.
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