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Capital markets regulator Securities and Exchange Board of India (SEBI) on Friday proposed facilitating the participation of retail investors in algorithmic trading (algo trading), which provides advantages of faster order execution and improved liquidity.

The proposal, if implemented, is expected to fill in the void for retail investors who want to trade using algos with adequate safeguards.

In an effort to enhance market efficiency and transparency, SEBI introduced algo trading through the Direct Market Access (DMA) facility, which provided significant advantages such as faster order execution, reduced transaction costs, greater transparency, better audit trails and improved liquidity.

However, access to these facilities has been limited to institutional investors.

In its consultation paper on Friday, SEBI proposed extending the existing regulatory framework, with additional safeguards, to facilitate the participation of retail investors in algo trading.

“The evolving nature of algo trading, particularly with the increasing demand for algo trading by retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in algo trading with proper checks and balances,” SEBI said.

Further, the regulator proposed 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)—so that the retail investors can avail algo facilities with requisite safeguards.

SEBI said that the facility of algo trading would be provided by the stock broker only after obtaining the requisite permission from the stock exchange for each algo.

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

For the purpose of provision of algo trading through Application Programming Interfaces (APIs), brokers should be the principal while any algo provider or fintech/vendor would act as its agent while using the API provided by the broker.

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

For better oversight, any algo provider, providing the facility to place algo orders with brokers through API, would be required to be empanelled with exchanges in a manner as stipulated by exchanges. The exchanges should specify the eligibility criteria for the algo providers.

Exchanges should be responsible for supervising algorithmic trading and inspecting that brokers have the ability to distinguish between algo and non-algo orders.

The detailed operational modalities, regarding the roles and responsibilities of the brokers and algo providers including the risk management system of brokers for orders through API, should be issued by stock exchanges, in consultation with SEBI.

“Exchanges shall specify the turnaround time (TAT) to register certain types of algos (eg. Execution Algos) on a fast-track basis while registering other types of algos on a normal basis. For both these scenarios, TAT shall be decided by the stock exchanges and mentioned in their Standard Operating Procedure (SOP),” SEBI proposed.

SEBI has sought public comments on the proposals till December 3.