SEBI’s New Framework for Safer Retail Algo Trading – What It Means for You

The article “SEBI’s New Framework for Safer Retail Algo Trading – What It Means for You” was originally posted on QuantInsti blog.

On February 4, 2025, SEBI introduced a circular aimed at making algorithmic trading safer and more transparent—especially for retail investors. This is a notable shift, as algo trading was primarily the domain of institutional players in the past. With these new guidelines, SEBI intends to broaden retail participation while maintaining strict risk controls.

Key Highlights

1. Clear Thresholds for Retail Algos

• Order-Per-Second Limit: Individuals developing or using their own algos must register them—through their broker—if they exceed a specified order-per-second threshold.
• Restricted Sharing: Such algos can only be extended to close family members, ensuring tight control over usage.

2. Greater Traceability & Security

• Unique Order IDs: Each algo trade will carry a unique identifier from the exchange, helping maintain an accurate audit trail.
• Robust Authentication: Two-factor authentication (via OAuth protocols) is mandatory, fortifying account security.

3. Stricter Oversight by Brokers

• Exchange-Approved Algos: Brokers need to secure approval for each algo strategy from the respective exchange, including any subsequent modifications.
• Handling Investor Grievances: Brokers remain the primary point of contact for any retail client issues, ensuring centralized accountability.

4. Empanelment of Algo Providers

• Due Diligence and Recognition: Algo providers (fintech vendors) must be empaneled by the exchanges, and brokers are expected to perform their own checks before onboarding them.
• Fee-Sharing Arrangements: Brokers and algo providers can share revenue from subscription charges, provided all costs are disclosed and conflicts of interest are addressed.

5. Category-Based Algos

• White Box Algos (Execution Algos): Their logic is openly available, allowing users to see precisely how trades are generated.
• Black Box Algos: The logic is hidden. Providers must register as Research Analysts and keep detailed research reports for each strategy.

6. Clear Implementation Roadmap

• Framework by April 1, 2025: The Brokers’ Industry Standards forum in consultation with SEBI will publish detailed guidelines and SOPs.
• Compliance by August 1, 2025: All market participants (investors, brokers, and algo providers) must meet the new standards. This timeframe may prove challenging, but it underlines SEBI’s intent to streamline the process swiftly.

Why This Matters

• For Retail Investors: Offers a regulated pathway to use advanced trading tools, with built-in checks for safety.
• For Brokers: Increases oversight responsibilities and demands technical preparedness to manage algos securely.
• For Algo Providers: Establishes a formal role and clearer expectations, including the need for registration and disclosures.

Overall, SEBI’s framework aims to encourage broader market participation while mitigating risks. As the August 1 deadline approaches, brokers, investors, and providers will work to align their systems and processes with these rules.

Link to the SEBI Circular: https://www.sebi.gov.in/legal/circulars/feb-2025/safer-participation-of-retail-investors-in-algorithmic-trading_91614.html#