Algo trading: Sebi proposals and market concerns

What is the News?

Securities and Exchange Board of India(SEBI) has proposed that all orders emanating from the Application Programming Interface(API) of stockbrokers should be treated as algorithmic trading.

What is Algo Trading? And Why SEBI wants to regulate them?

Key Features of Algo Trading 

First, the algo runs on the broker’s systems and not on the investor’s system. 

Secondly, algo trading requires no human involvement from either the broker or the investor. 

Thirdly, the algo trading system automatically monitors the live stock prices and initiates an order when the given criteria are met. This frees the trader from having to monitor live stock prices and initiate manual order placement.

What is API?

API stands for Application Programming Interface. It is a program that establishes an online connection between a data provider and an end-user.

What role does API play in trading?

APIs have become increasingly popular with the rise of automated trading systems. In the past, retail traders were forced to screen for opportunities in one application and separately place trades with their broker. 

Many retail brokers now provide APIs that enable traders to directly connect their screening software with the brokerage account to share real-time prices and place orders.

What are SEBI’s proposals on Algo Trading?

There is a need to create a regulatory framework for algo trading.

For this, all orders emanating from an APIs (Application Programming Interface) should be treated as an algo order and be subject to control by the stockbroker.

APIs carrying out algo trading should be tagged with the unique algo ID provided by the stock exchange.

All algos developed by any entity has to run on the servers of brokers, wherein the broker has control of client orders, order confirmations and margin information.

The stockbroker is responsible for all algos emanating from its APIs and redressal of any investor disputes.

What are market concerns against these proposals?

Securing exchange approvals for any algo is already an extremely tedious and complex process. If these proposals are implemented, brokers will have to stop offering APIs and might shift to some other system.

Source: This post is based on the article “Algo trading: Sebi proposals and market concerns” published in Indian Express on 18th Dec 2021.