On Tuesday, the National Stock Exchange (NSE) unveiled new compliance guidelines aimed at enhancing retail investor participation in algorithmic (algo) trading. This initiative comes in response to the Securities and Exchange Board of India (Sebi)’s recent efforts to bolster the safety of retail investors engaging in algo trading, which leverages automated software for executing trades based on predefined codes.

Enhanced Compliance Norms for Algo Trading

The recently released guidelines impact all types of algo trading, including those utilized by stockbrokers, algo service providers, and even those created by clients themselves. The aim is to create a structured framework that ensures a secure trading environment.

• API Access for Retail Investors: Stock brokers are now permitted to offer their retail clients access to their trading systems via an Application Programming Interface (API). To facilitate this, clients need to provide a static IP address that will be linked to specific API keys for seamless connectivity to the broker’s platform.

Important Restrictions and Features

A key stipulation is that a static IP address can only be associated with one client at a time; however, it can be shared among family members. This API access will be mandatory for both client-generated and broker-generated algorithmic trades. Notably, all API sessions must be logged out daily to enhance security.

• Weekly IP Address Updates: Retail traders will have the flexibility to update their static IP addresses on a weekly basis. Additionally, if clients acquire multiple API keys, brokers are tasked with ensuring that non-registered algorithms operate solely through predefined API keys.

Industry Expert Opinions

Harsha M, founder and CEO of Zerodha Streak, expressed that these new guidelines represent a significant advancement for retail investors interested in algo trading. “This circular serves as a pivotal shift, aimed at enhancing the safety of retail participants,” he stated. He also emphasized that these changes will promote transparency and enforce robust security measures, benefiting responsible innovation in the sector.

Benefits of Algo Trading

Algo trading offers numerous benefits, including:

• Precision in Order Execution: Orders can be executed at optimal times based on programmed strategies.
• Increased Liquidity: The presence of algorithms boosts overall market liquidity.

Institutional investors have long utilized algorithms to trade through mechanisms like Direct Market Access (DMA).

Sebi’s Ongoing Commitment

The regulatory framework was revisited by Sebi in February to accommodate the rising interest in algo trading among retail investors. “To ensure safer participation, we are refining our existing regulations to maintain proper checks and balances,” the authority stated.

New Trading Limitations

Among the new regulations, the Threshold Order Per Second (TOPS) has been initially capped at 10 orders, with the potential for adjustments by the stock exchanges after notifying the market. Orders that fall below this threshold will not require registration for algo trading and will receive a generic algo ID from the exchange.

Furthermore, tech-savvy retail investors who develop their own algorithms must register these with the exchange via their brokers if they exceed the TOPS. Responsibility for addressing grievances related to algo trading will rest solely on brokers. Notably, a ban was imposed in September 2022 on brokers collaborating with unauthorized algo trading platforms.

Regulatory Authority and Fees

The NSE retains the authority to deactivate any rogue algorithms that may disrupt market integrity. Additionally, brokers may levy extra charges on retail investors for providing API access.

In summary, these comprehensive guidelines represent a forward-thinking approach to algo trading, ensuring that retail investors can engage in this innovative trading practice with enhanced safety and transparency.