The Securities and Exchange Board of India (SEBI) and the National Stock Exchange (NSE) have introduced a new system for algorithmic trading, also known as algo trading.
Under this system, any app, software, or API that carries out automated trading must now be registered and approved by the NSE.
What is Algo Trading?
Algo trading involves using a computer program to automatically place trading orders without human involvement.
Key Rules for Algo Trading
Registration Required: Any company or fintech offering trading through APIs must register with NSE. Without this registration, their algo systems cannot operate.
Access for Retail Investors: Retail investors can now do algo trading via brokers using APIs. Each algorithm will be categorized under five levels—frontend, developer, user, strategy type, and strategy style.
Black Box Algos: Algos that do not reveal their internal logic (called Black Box Algos) must register as a Research Analyst (RA) with SEBI.
Unique Algo ID: Every algorithm will receive a unique identification number to help with tracking and monitoring.
Risk and Security Checks: Brokers must validate each algo’s limit, price, quantity, and margin before allowing it to trade. If these checks are missing, the algo will not function.
Impact on the Market and Investors
Retail Investors: Trading tools and apps that use APIs will not work without proper NSE registration. Skilled retail investors can still create and use algos, but only under certain rules. Free or unregulated tools may be restricted or banned.
Algo Platforms: Popular platforms like Zerodha Streak, Tradetron, and Algotest will have to get NSE approval for each algo they offer and submit risk and audit reports.
Broker Responsibilities: Brokers must make sure their clients use only NSE-approved algos. They are required to maintain records, logs, and audit trails for every algorithm used.
Approval and Data Rules
Algos that only execute orders will get approval within 7 days.
Other types of algos will be approved within 10 days.
All data related to algos and APIs must be encrypted.
Client data must stay within the broker’s server and cannot be shared externally.
Important for Retail Clients
Retail investors will access algos only through registered brokers. Using unapproved algos may lead to trading restrictions or halts.
