The Future of Algo Trading in India: SEBI’s 2025 Updates

Algorithmic trading, often called algo trading, involves executing buy and sell orders automatically using pre-set instructions. These algorithms take into account market variables such as price, volume, timing, and other conditions. The main purpose of algo trading is to allow fast, rule-based transactions with minimal human intervention, improving both execution speed and accuracy.

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The Previous System

Traditionally, algorithmic trading in India was dominated by institutional players. These firms leveraged Direct Market Access (DMA) and co-location facilities to achieve extremely low latency and efficient trade execution. Retail traders, however, mainly relied on broker-provided APIs or third-party platforms for automation.

Despite its growth, retail algorithmic trading operated without regulatory oversight. There was no standard framework to govern the use of retail algorithms or the platforms offering strategy-based trading through APIs. This lack of regulation raised concerns about market transparency, misuse, and potential risks, especially as retail adoption surged.

Why SEBI Introduced New Regulations

The rise of retail algorithmic trading highlighted the need for a structured regulatory framework. Poorly coded or unmonitored algorithms could place erroneous, excessive, or manipulative orders in the market, creating systemic risks. Many retail investors also lacked a clear understanding of how algorithms function, increasing the possibility of errors.

SEBI’s regulations aim to:

• Enhance transparency and accountability in algorithmic trading
• Protect investors from unverified or risky strategies
• Minimise the potential for market disruption from malfunctioning algorithms
• Strengthen the responsibilities of brokers and algorithm providers

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Key Features of SEBI’s 2025 Algo Trading Framework

1. Mandatory Exchange Approval  

All trading strategies must be approved by the stock exchange before being deployed in live markets. Brokers are responsible for ensuring compliance. This reduces the risk of flawed or untested algorithms impacting market stability.

2. Unique Algo ID Tagging  

Every algorithmic order must carry a unique identifier (Algo ID) that links it to an approved strategy. This allows exchanges to monitor performance, detect errors, and identify suspicious activity in real time. Algo IDs are assigned only after the strategy passes thorough testing.

3. Classification of Algorithms: White Box vs Black Box  

Algorithms are categorised as:

• White Box: Transparent strategies that are fully understandable and replicable by users.
• Black Box: Proprietary strategies with undisclosed logic. Providers of black-box algorithms must register as Research Analysts with SEBI and maintain detailed documentation.

White box algorithms are easier to monitor, while black-box strategies undergo more rigorous scrutiny.

4. Registration of Algorithm Providers  

Algorithm providers must be registered and empaneled with stock exchanges before brokers can offer their strategies to clients. This prevents unverified providers from offering potentially unsafe solutions to retail traders.

5. Deployment via Broker Infrastructure Only  

SEBI has banned open APIs for retail algo trading. Algorithms must operate exclusively on broker-hosted infrastructure. Third-party servers or cloud environments can only be used if fully integrated with broker systems. Brokers must maintain logs of strategy execution, implement pre-trade risk checks, and ensure the systems are auditable by both the exchange and SEBI.

6. Broker Responsibility and Oversight  

Brokers must:

• Approve and register client algorithms
• Ensure only exchange-approved strategies are deployed
• Monitor API usage and maintain detailed audit trails
• Implement pre-deployment testing, real-time monitoring, and alert systems
• Control access to prevent clients from bypassing compliance measures

7. Risk Mitigation Controls  

Brokers and exchanges are required to implement real-time risk controls, such as:

• Order throttling: Limiting the number of orders per second
• Kill switch: Instantly disabling malfunctioning algorithms
• Enhanced authentication: Using Two-Factor Authentication (2FA) and OAuth
• Whitelisted IPs: Allowing API access only from pre-approved addresses

These measures reduce the likelihood of flash crashes, order flooding, and other disruptions.

8. Self-Developed Algorithms  

Retail traders can use personally developed algorithms on their own or immediate family accounts. However, if trading exceeds a defined order-per-second threshold, these strategies are subject to the same regulations as professional algorithms.

9. Regulations for Black Box Algorithms  

Black box providers must:

• Register as Research Analysts with SEBI
• Maintain detailed records of their algorithm logic
• Seek re-approval for any significant modifications

This ensures that backdoor changes or manipulations are prevented.

10. Client Disclosures  

Brokers must clearly disclose APIs, third-party integrations, and associated risks. Clients should be made aware of potential latency issues, market impact, and any subscription or brokerage fees.

Impact on Stakeholders  

The new SEBI rules introduce compliance requirements, but they also offer several benefits:

• Greater safety and transparency for both retail and institutional traders
• Enhanced investor awareness through education initiatives
• Stronger oversight to prevent fraud and manipulation
• Clear accountability for brokers and algo providers
• Reduction in system overloads and abnormal orders through tagging, monitoring, and risk management
• Brokers and algorithm providers must now develop systems to approve, monitor, and audit all client algorithms, ensuring full compliance with SEBI’s guidelines.

Conclusion  

SEBI’s 2025 regulations represent a significant step toward creating a secure, transparent, and accountable algo trading ecosystem in India. While some measures may initially appear restrictive, they are intended to protect investors, promote fair market practices, and support responsible innovation.

Through strategy approvals, unique identifiers, infrastructure control, and robust monitoring, SEBI is fostering long-term trust in the algorithmic trading domain. Retail traders, brokers, and algorithm providers now have clear rules to operate within a regulated framework, ensuring that the growing adoption of algorithmic trading strengthens the market without compromising its integrity.