What Is Algo Trading

Algorithmic trading is the use of Computational Algorithms based on processes and rules to execute transactions. This involves decision-making that uses sets of rules and variables like price, time, and volume to address trading issues that previously might have needed a group of financial experts but now done by a software. It is fully Automated system mostly used by big Institutional Investors who trades in high volumes and numbers and this decreases the chances of human errors. And saves time and money.

SEBI About Algo Trading

SEBI Released its first set of recommendations on March 30, 2012. No rules, regulations, penalty, no breach regarding points were mentioned. That was a general circular regarding the Algo trading.

Circulars were sent consequently throughout the year regarding the restrictions and policies of using algo trading software but till then no notice regarding the retail investors usage was mentioned, then finally on February 4, 2025 via circular no. SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/0000013 declared that now retail investors can also use Algo trading software. this will take effect on August 1, 2025, In the meantime, the exchanges and brokers have till April 1st to finish all procedures and SOPs.

Recent On 4th February
Algo trading will enable a retail trader to automatically execute orders without human intervention. Only registered brokers can now provide retail traders with access to certified algorithms, guaranteeing security and openness. The functions and obligations of investors, brokers, algo providers/vendors, and Market Infrastructure Institutions (MIIs) are outlined in a structured regulatory framework that SEBI has developed. Sebi has mandated the registration of algo trading firms with stock exchanges and set API regulations to enhance investor security.

About API

An API is a software bridge that allows two software programs to communicate with one another. Now, let's explore the operation of APIs.

When you ask the application to perform something, the API acts as a mediator between the application and the server, As a result, when you ask an application to retrieve data during trading, the application uses a trading API to deliver the request to the server. The request is processed once it reaches the server, and the intended outcome appears.

Crucial Aspects To Be Considered By The Sebi Regulation

Use reliable service provider SEBI has required that all algo trading providers be empanelled with stock exchanges prior to brokers onboarding them in order to maintain credibility. Retail investors are prevented from using algo trading solutions from unreliable or dubious service providers or businesses. They must get approval from Stock exchange before offering any algorithm to retail investors, brokers must get stock exchange approval. Furthermore, the exchange must pre-approve any changes made to approved algorithms. This ensures that all trading strategies comply with SEBI's guidelines.

The new rules will make it illegal to use open APIs. To ensure identification and traceability, access will only be granted through a unique vendor client. Sebi stated, In order to create an audit trail, Algo orders must be marked with a special identification number that the exchange provides. Any changes to authorized algorithms must be approved by the exchange. They all must be listed with Stock exchange Only brokers who are listed with the exchanges are permitted to onboard algo trading services, and they are encouraged to perform due diligence before doing so.

No matter if investors develop their own Algorithms these is mandatory to register with stock exchange through their broker if they exceed the order-per-second cap. These investors will be allowed to give their algos to members of their immediate Family. Trading with "Blackbox algos" will necessitate registration as a Research Analyst with the market regulator. Any changes to blackbox algorithms' logic will also necessitate re-registration and the maintenance of an extensive study report.

There will be strong monitoring policies SEBI won't be directly monitoring algo providers, but the new rules will be implemented through exchanges that will monitor algo trading and specify empanelment Standard. Maintaining secrecy Measures which will enhance the Confidentiality of retail algo strategies including confidentiality clauses, non-disclosure agreements, encrypted submissions etc.

Tat Fast Track
Exchanges shall specify the turn around time (TAT) to register certain types of algos(eg. Execution algos) on a fast track basis while registering other types of algos on a normal basis. For both these scenarios , TAT shall be decided by the stock exchanges and mentioned in their SOP, disclosed on their website.

Role Of Brokers
Brokers can allow their clients to use automated trading systems if those systems are approved by the stock exchange they are not allowed to give clients direct access to these systems through open APIs all problems faced by trader will be Solved by Broker They can only offer automated trading if its done through companies that are officially registered with SEBI which will keep the system safe and reliable.

Those Brokers who offer algo trading to investors must follow existing rules which is to get permission from the stock exchange for each specific trading algorithm they use Unique identifier number must be given to all algorithmic trading from stock exchange for tracking them . For execution algorithm, the registration is prioritized like stock exchange set a specific turn around time (TAT) for registering different types algorithms & rest of them other type will follow the normal process The decision lies on the exchanges for which one to cover under TAT & which to normal process and provide these information in standard operating procedure (SOP) available on website. Brokers must take active part in maintaining safety, transparency and fairness of the algorithm trading.

Role Of Traders
Traders have multiple roles to ensure that system operate efficiently collide with trading goals adapts to market condition their task is to take responsibility of overseeing their performance for issues like system error, algorithm failure and unexpected market behaviour and to prevent them .As long as their order frequency is below the level set by the exchange, retail traders can still automate transactions using APIs trader use broker provided APIs to automate their trades , but they must make sure their trading activity stays within the allotted restrictions .The overall goal of the new rules is to give algorithmic trading to retail traders a defined framework with maintaining market fairness and transparency.

Disclosure Requirements
For protecting the secrecy of retail trading algorithms measures like confidentiality agreements, Non disclosure agreements, secure & encrypted compliance will be used . Algo providers and brokers may share the subscription charges and brokerage collected from the client. However, prominent and complete disclosures of all the charges shall be made to the client. The broker shall also ensure that such arrangements do not result in any conflict of interest.

There Are 2 Categories Of Algo Trading:

Black Box

To ensure transparency and accountability, providers of black box algorithms, which operate without revealing their internal process, will be required to obtain a Research Analyst license and maintain thorough documentation of their research methodologies. Criteria For Black Box Algorithms Must:

• Register as a research analyst.
• Maintain a detailed research report for each black box algorithm.
• Confirm to the exchanges that these reports are being maintained.
• If any amendment in algorithm logic, register the modified algorithm as a new one, maintain a new detailed research report, and again confirm its maintenance to the exchanges.

White Box

Also referred to as execution algorithms, these are categorized by their transparent and replicable logic. Their internal working is known and can be reproduced.

IP Static Whitelisting

Ip whitelisting is like having a VIP list for your computer systems. You create a list of trusted computer address and only computers on that list are allowed in and anyone trying to access your system from anywhere will be immediately blocked and also private business operations are protected.

EX - It's like hosting a party and preparing a guest list and access will be given to those only who are on the list and not to everyone.

Conclusion:
This is a significant step towards Promotion of Safe Trading Practice im India. we all are awaited for the Commencement of the new rules from 1st August . This new rules will allow indian investors and traders to maximize their Profits and explore new Strategies beyond any boundaries. Indian Customers have always shocked the global markets by making bold shifts. Hence, we hope from the best of the interest of the retail investors The New Rules will help to reduce Human errors and increase efficiency of the individuals. This has also increased Concerns towards the safety of the user data.

Also Read:

• Algorithmic Trading