The National Stock Exchange (NSE) has recently rolled out new guidelines to facilitate retail investors’ participation in algorithmic trading, spurred by a request from the Securities and Exchange Board of India (SEBI). These regulations aim to enhance market oversight while enabling retail participants to engage in automated trading, thereby boosting liquidity across the financial landscape.

Why Retail Investors Can Now Engage in Algo Trading

The decision to allow retail investors access to algorithmic trading comes in response to a growing demand for such options among individual traders. SEBI emphasized the need to refine existing regulations to ensure that retail investors can participate safely and responsibly. Under the new framework, brokers will bear full responsibility for addressing any grievances related to algo trading activities.

Institutional investors have long utilized algorithms through Direct Market Access, but the NSE’s guidelines mark a significant shift in how retail investors can participate. A circular from SEBI dated February 4, 2025, mandated that all algo-trading service providers must register with stock exchanges and adhere to specific rules regarding application programming interfaces (APIs). Although these new regulations were initially set to launch on April 1, 2025, they have been postponed to August 1, 2025, allowing exchanges time to finalize the necessary standards. The NSE is the first to complete this process, with the Bombay Stock Exchange (BSE) still in the works.

How Retail Trades Will Be Executed

To engage in algorithmic trading, retail investors will need API access from their stockbrokers. Each retail trader must provide a static IP address, which will be linked to their API keys for connection to the broker’s trading system. Here are key points regarding this process:

• Static IP Limitations: A static IP can be allocated to one trader at a time but may be shared among family members.
• Mandatory API Access: API access is essential for both client-generated and broker-generated algorithmic trades.
• Daily Logout Requirement: All API sessions must be logged out at the end of each trading day.
• Weekly IP Updates: Retail traders can update their static IP addresses, but only once per week.

Order Execution Threshold for Retail Investors

The NSE has set a threshold of 10 orders per second (TOPS) for algorithmic trading. If a trader’s orders fall below this rate, they won’t need to register their algo with the broker’s system. Such trades will be categorized under ‘Algo,’ and the NSE will assign a generic algo ID. However, tech-savvy retail investors who develop their own algorithms must register them if they exceed the TOPS. Additionally, brokers are prohibited from collaborating with unauthorized algo trading platforms.

Anticipated Effects of the New Guidelines

The introduction of a mandatory static IP for all algo trading is expected to enhance market surveillance by improving traceability and accountability. The TOPS threshold of 10 orders per second aims to mitigate the effects of high-frequency trading strategies, at least in the early stages. Notably, traders generating fewer than 10 orders per second are exempt from registration requirements, providing them greater flexibility. While the registration process may initially slow innovation, it is likely to lead to improved oversight in the long run.

Prominent Institutional Algo Trading Firms

Several major institutional investors are deeply engaged in algorithmic trading, including:

• Goldman Sachs
• Morgan Stanley
• QuadEye Securities
• Graviton Research Capital
• Jane Street
• Citadel Securities

These firms employ various trading strategies, from High-Frequency Trading (HFT) to proprietary trading aimed at risk-adjusted returns. Market makers, who ensure liquidity by continuously buying and selling, along with quantitative hedge funds utilizing advanced statistical models, also play significant roles in the algo trading ecosystem.

Weighing the Pros and Cons of Algo Trading

Algorithmic trading offers several advantages, such as minimizing human errors and emotional decision-making, resulting in potentially higher profits. Currently, algo trades account for 43% of the turnover in the Indian stock market, compared to 75% globally. In the U.S., a staggering 90% of equity market turnover originates from algorithmically driven trades.

While high-frequency traders represent a notable percentage of trades executed in U.S. markets, their influence on market volatility raises concerns among regulators worldwide. The ongoing debate centers around finding a balance between the risks posed by rapid trading and the liquidity benefits it provides.

With these new guidelines, the NSE aims to foster a more inclusive and regulated environment for retail investors, ultimately enriching the trading experience while prioritizing market integrity.