Interpretation of SEBI Circular titled: Safer participation of retail investors in Algorithmic trading

[MohitGolecha]

Hey folks,

I tried breaking down the circular SEBI shared day before yesterday about algorithmic trading for retail investors. Here’s a different perspective/take on this. Circular can be found here.

While a lot of folks across the industry have broken down & infer what the circular means, I’m fundamentally just trying to see what the circular says/confirms and not come to any assumptions/conclusions till the exchanges/BISF come up with the framework & other details. You folks on the other hand - let the speculations rip!

A few of terms used in the circular to keep handy!

1. Threshold: Number of orders per second.
   See this as a rate limit from the SEBI’s angle. Accounts placing orders above & below this number will be regulated differently. This limit number will be specified by the exchange/BISF latest by April 1
   
   

Now let’s get at it!

Understanding Algo Orders

1. Any order above the threshold is to be considered/tagged as an Algo Order
2. 2. Every algo order needs to be tagged with an Algo ID
      
      

Understanding Algo ID

1. This is a unique identifier of algorithmic strategies through which an order is being placed
2. Every Algo Order requires and AlgoID while placing the order
3. Traders/investors need to seek the AlgoID via their brokers to place “Algo Orders”
   
   

Understanding Retail Individual Algo Approvals from Exchange

1. Retail traders, registering to exchanges via brokers is only needed if the number of orders is above the threshold value.
2. The same algo, can be shared/used to place trades only for their immediate family members - only if it has been registered with the exchange.
   
   

Understanding trading via Open APIs

As I’m yet to seek more clear picture on this hot topic, here are few speculations/cannons!

1. SEBI wants each user to request access to APIs to brokers rather than having it open it all users
2. To place orders via APIs, along with the secret_key & client_id, a unique vendor_client is mandatory
3. OAuth with 2FA is mandatory (as it is today)
4. All orders via APIs can only be passed by the broker to the exchange if the order is coming from a whitelisted static IP

(I think, these might be relevant actions to curb inappropriate algo-trading platforms and keep things safe for investors/trades in case of a rug-pull)

Understanding Registering of Algos

1. White box: Disclose logic to the exchange
2. Black box: Logic is not disclosed to the exchange
   
   

Understanding Blackbox Algo regulations

1. Can only be provided by SEBI registered individuals/firms
2. Maintain research reports & confirm its maintenance to the exchange. This is useful during an audit/investigation trail.
3. Update the exchange in case of changes to the logic of the algorithm
   
   

All liabilities/grievances are to be managed by the broker and is on them to maintain the standards of algo regulations where retail traders can stay safe.

1. This enhances the safety of retail traders as the broker shall only be allowing trades placed by “empaneled algo-providers”

Understanding Empaneled Algo-providers

Self-explanatory
No comments - as this will be decided by exchanges & BISF is the coming weeks

Miscellaneous

1. Wait for the Exchanges/BISF to fully release and provide clarity on the framework & the method of registering Algos
2. BISF’s set regulations to be out by 1st April, 2025 and in effect from 1st August 2025.
3. Exchanges will have Surveillance & Kill switch control for each registered algo for direct access incase of malfunction.’

That’s all for now. Till exchanges roll out more clarity, let the speculation begin!