Capital markets regulator Securities and Exchange Board of India (SEBI) has proposed a regulatory framework by easing rules for the participation of retail investors in algorithmic trading. Explaining the roles and responsibilities of stock brokers in algorithmic trading, SEBI says brokers providing the facility of algo trading to investors will continue to abide by the extant provisions related to algo trading. The facility of algo trading will be provided by the stock broker only after obtaining the requisite permission of the stock exchange for each algo.

All algo orders will be tagged with a unique identifier provided by the stock exchange to establish an audit trail and the broker will seek approval from the exchange for any modification or change to the approved algos or systems used for algos.

On the use of API for algo trading, the regulator says brokers will be the principal, while any algo provider or fintech or vendor will act as its agent while using the API provided by the broker.

"All orders, above the specified order per second threshold, originating or flowing through API extended by brokers to their clients/service providers, will be treated as algo orders and will be tagged with a unique identifier provided by the stock exchange. This is in addition to orders already tagged as algo orders," says SEBI.

Algos developed by tech-savvy retail investors themselves, using programming knowledge, will also be registered with the exchange through their broker. Further, the same registered algo will be permitted to be used by such retail investors for their family, says the regulator.

On the stock exchange, the regulator says they will be responsible for supervising algorithmic trading while ensuring the post-trade monitoring of algorithmic orders and trades, including putting in place a standard operating procedure (SOP) for testing of algos. They will continue to have the ability to use the kill switch for orders emanating from a particular algo ID.

SEBI says its latest circular is aimed at spelling out the rights and responsibilities of the main stakeholders of the trading ecosystem -- investors, stock brokers, algo providers/vendors and market infrastructure institutions (MIIs). It has undertaken consultations with stakeholders, including the intermediary advisory committee and brokers industry standards forum to extend the existing regulatory framework, with additional safeguards.