The Securities and Exchange Board of India (SEBI) has released a consultation paper proposing new regulations for algorithmic trading (algo trading) by retail investors, aiming to balance innovation with investor protection.
Key Proposals
SEBI’s consultation paper outlines several important regulatory changes:
– Mandatory registration with exchanges for all algo trading systems
– Unique algo identifier for each trading strategy
– Two-factor authentication for algo order placement
– Daily transaction limits for retail algo traders
– Mandatory audit trail for all algo trades
Registration Requirements
Under the proposed framework, retail investors using algo trading will need to register their algorithms with stock exchanges through their brokers. Each unique algorithm will receive an identification code for tracking purposes.
Risk Management Norms
The framework proposes daily turnover limits and order-to-trade ratio restrictions to prevent market manipulation. Kill switches will be mandatory to halt trading in case of malfunctions.
Broker Responsibilities
Stockbrokers will be required to conduct due diligence on algo strategies offered to retail clients and ensure compliance with exchange guidelines.
Industry Response
Market participants have welcomed the balanced approach, noting that the framework provides clarity while allowing innovation. However, concerns remain about implementation complexity.
Public Comments
SEBI has invited public comments on the proposal until January 25, 2026. The final regulations are expected to be notified by March 2026.
Impact Assessment
The proposed regulations are expected to bring transparency to the rapidly growing algo trading segment, which now accounts for over 60% of exchange trading volumes.
