SEBI’s New Algorithmic Trading Regulations: What Brokers & Investors Need to Know

resr 5paisa Research Team

Last Updated: 5th February 2025 - 12:07 pm

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Brokers have been gearing up for the introduction of SEBI’s new algorithmic trading (algo trading) regulations, which aim to facilitate retail investors interested in algorithmic trading. However, before making significant investments in what could be a major opportunity, they are waiting for further clarity on certain aspects.

On February 4, the Securities and Exchange Board of India (SEBI) released a circular outlining a framework designed to ensure safer participation of retail investors in algo trading through brokers. This announcement came nearly a month earlier than industry participants had anticipated and were preparing for.

According to the circular, the implementation standards will be established by April 1, 2025, with the new regulations set to take effect on August 1, 2025.

Brokerages interviewed by Moneycontrol mentioned that they had expected these norms to be announced in March and had been consulting compliance and technology experts to develop relevant products in preparation.

Industry experts believe this move could provide much-needed relief for brokerages, especially after recent regulatory changes concerning index-derivatives trading and the discontinuation of exchange paybacks for generating trade volumes. However, some firms are opting for a cautious approach, investing in algo trading gradually due to lingering uncertainties about certain directives and the potential impact on trading volumes once the new index-derivatives rules are fully in effect. The deadline for two of the last directives was February 1, 2024.

Why Now?

SEBI highlighted the growing demand for algo trading among retail investors, which necessitated a review and refinement of existing regulations.

Although algo trading has been regulated since 2012, it was initially limited to institutional investors. However, following a surge in demand during the pandemic, retail traders increasingly sought access to this service.

This rise in interest also led to the emergence of unregistered algo marketplaces, where retail investors could purchase trading strategies and integrate them with their brokerage accounts. SEBI scrutinized these setups, particularly their promotion of past-performance metrics, which violated the regulator’s September 2022 directive. This rule prohibited stock brokers from associating with any platform that referenced past performance as a selling point.

In October 2024, SEBI issued notices to over 115 stock brokers for their continued involvement with the algo platform Tradetron.

According to market insiders, since late 2023, SEBI has been engaging with brokerages and algo providers to understand how best to regulate and support this growing demand while maintaining market integrity. Following these discussions, a consultation paper was released in December, and the final circular was issued in February.

What’s Next?

Meanwhile, brokerages have been working behind the scenes to develop algo trading services and products.

Rajesh Sriwastava, founder of Quant Lab and a trader with over 20 years of experience, has been assisting brokerages in building the necessary technology infrastructure to support retail algo trading. His work includes advising firms on hardware requirements and the process of obtaining exchange approvals for trading algorithms.

Currently, he is advising three brokerages—including one bank-run firm and another publicly listed brokerage—while in discussions with four others.

Need for More Clarity

A senior executive from a leading brokerage welcomed the new regulations, noting that they would simplify the process of automating trading strategies for retail investors. Another brokerage head mentioned that many firms are already equipped to offer algo trading but are awaiting further details on obtaining algo clearances and other operational aspects.

One major area of uncertainty is the threshold that distinguishes algo trades from regular trades. According to the circular, orders executed at a specific speed will be classified as algo trades, but SEBI has yet to define this speed (measured as the number of orders per second). A senior executive mentioned that this detail will be finalized after discussions with the industry standard forum (ISF).

Additionally, brokerages seek clarification on the regulations surrounding white-box algos (where the trading logic is transparent) and black-box algos (where the logic remains confidential).

Beyond these concerns, brokerages are closely monitoring the impact of the new index-derivatives regulations on overall trading volumes. If volumes decline significantly, some firms may shift their focus from derivatives to providing algo trading solutions for the cash segment instead.

According to Sriwastava, brokerages are undergoing a fundamental shift in how they approach their clients. "Brokerages traditionally didn’t have a trader mindset, but now they do. They also want to keep clients within their ecosystem, which is why they are expanding their service offerings," he explained.

This shift includes integrating popular features from third-party algo platforms directly into brokerage systems, ensuring that clients no longer need to rely on external services.

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