Sebi proposes retail investors participate in algo trading

India's markets regulator on Friday proposed a framework to allow retail investors to participate in algorithmic trading through stock brokers.

In 2008, the Securities and Exchange Board of India (Sebi) had introduced algorithmic trading which provided facilities like faster order execution, reduced transaction costs and greater transparency. However, algo trading was permitted only for institutional investors.

A study published by the regulator in September showed that during fiscal year 2024, algorithmic trading accounted for 97 per cent of foreign investors' and 96 per cent of proprietary traders' profits in futures and options.

Sebi said that there has been an increasing demand for algo trading by retail investors, and thus the need to review the framework to safeguard investor interest and maintain integrity of the market.

The regulator, via a draft circular published on its website, has proposed that stock exchanges will need to grant approval for each algo that will be used by retail investors.

Moreover, all such orders will need to be tagged with a unique identifier for transparency in audit processes.

Algos developed by "tech-savvy" retail investors will need to be registered with exchanges, it added.

Exchanges will be responsible for supervising algorithmic trading for retail investors, including defining the roles and responsibilities of brokers.

The regulator has sought comments from the public before it finalises a date of implementation of its proposals.