Market regulator SEBI has proposed to introduce the facility of algorithmic trading (algo trading) for retail investors. Currently, this facility is available only to institutional investors.
This technology makes trading faster, cheaper and more transparent through computer programs. By using algo trading, investors can buy and sell quickly.
This makes it easier to transact in the stock market and SEBI says that this facility will be provided to retail investors with safety and proper regulations. SEBI had sought suggestions from the public on this proposal till December 3. After this, the final rules will be issued. According to a previous study by SEBI, 97% of FPI (Foreign Portfolio Investors) and 96% of proprietary traders’ profits in Futures and Options (F&O) trade in FY24 came from algo trading.
According to the proposal given by SEBI, the facility of algo trading will be provided to retail investors through stock brokers. For this, the broker will first have to take permission from the stock exchange. Every transaction in the trade will be tagged with a unique identifier given by the stock exchange, so that the trade can be monitored. The broker will have to take permission from the exchange for any change in the algorithm system.
API will be used
API (Application Programming Interface-API) will be used for algo trading. Brokers will play a key role in this process, while algo providers or fintech companies will act as their agents. Providers providing algo trading facilities will have to register with the stock exchange.
According to a report in Business Standard, stock exchanges, in collaboration with SEBI, will decide on the responsibilities of brokers and algorithm providers. To speed up the registration of certain types of algorithms (such as execution algorithms), a turnaround time (TAT) will be fixed.
Ajay Garg, Director and CEO, SMC Global Securities Limited, says that SEBI’s proposal for algorithmic trading for retail investors is the need of the hour. He said that under the new framework, retail investors will be able to use approved algorithms only from registered brokers. This step will protect the interests of investors.
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