Retail Investors to Access Algo Trading
The Securities and Exchange Board of India (SEBI) is set to open the doors for retail investors to engage in algorithm-based trading, commonly known as algo trading. Currently, this trading method is exclusive to institutional investors. The move aims to create a more equitable trading environment, allowing retail investors to leverage the advantages of algo trading. This initiative is expected to enhance market participation and provide retail investors with tools that have previously benefited larger entities.
SEBI’s Proposal for Algo Trading
On Friday, SEBI released a draft circular proposing the inclusion of retail investors in algo trading. This proposal comes after a comprehensive study indicating that a significant portion of profits in derivatives trading is generated through algorithmic strategies. In the fiscal year 2024, approximately 97% of profits from foreign funds and 96% from proprietary traders were attributed to algo trading. Ajay Garg, CEO of SMC Global Securities, emphasized that this refined framework could build trust among retail investors and help them achieve higher profits, similar to institutional investors.
The draft circular outlines several checks and balances that brokers must implement to facilitate algo trading for retail investors. SEBI aims to ensure that the trading environment remains secure and efficient. The proposed system would allow exchanges to cancel any algo orders that do not comply with established rules, thereby maintaining market integrity. This initiative reflects SEBI’s commitment to evolving the regulatory framework to accommodate the growing demand for algo trading among retail investors.
Safeguards for Retail Investors
To protect retail investors, SEBI is proposing additional safeguards within the existing regulatory framework. The regulator plans to clearly define the rights and responsibilities of all parties involved, including investors, stock brokers, algo providers, and market infrastructure institutions (MIIs). This clarity is essential to ensure that retail investors can navigate the algo trading landscape with confidence.
Under the new proposal, retail investors will only have access to approved algorithms through registered brokers. This restriction is designed to create a safer trading environment and enhance the credibility of the algo trading process. Ajay Garg noted that this presents an opportunity for stockbrokers to expand their customer base while operating within a regulated framework. By establishing these safeguards, SEBI aims to foster a more inclusive trading environment that benefits all participants.
Implementation and Compliance Measures
In its draft circular, SEBI outlines specific compliance measures that stock brokers must adhere to before offering algo trading facilities. Brokers will need to obtain permission from stock exchanges for each algorithm they wish to provide. Additionally, all algo orders will be tagged with a unique identifier issued by the stock exchange. This tagging will create an audit trail, allowing for better monitoring and accountability in the trading process.
These measures are crucial in ensuring that the algo trading system operates smoothly and transparently. By implementing a robust compliance framework, SEBI aims to mitigate risks associated with algorithmic trading and protect the interests of retail investors. The proposed changes signal a significant shift in the Indian trading landscape, potentially leveling the playing field between institutional and retail investors. As the regulatory framework evolves, the market anticipates a surge in retail participation in algo trading, paving the way for a more dynamic trading environment.
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