By Nesil Staney
The National Stock Exchange (NSE) on Tuesday issued compliance norms for participation of retail investors in algorithmic (algo) trading, which combines software and traded securities, based on computer-programmed codes. These come on the back of Securities and Exchange Board of India’s (Sebi) recent guidelines to make retail participation in the algo trading safer.
The guidelines are for all categories of algo, including stockbrokers, algo providers or ones generated by clients themselves.
According to the circular, stockbrokers may provide retail investors with an API (application programming interface) access to their trading systems. Clients must provide the broker with a static IP address. It will be mapped to API keys from which they will be connected to the broker’s trading platform.
A static IP can only be mapped to one client at a time. However, it can be shared between clients belonging to the same family. It will be mandatory for API access for client-generated algorithmic trades and for ones generated by brokers. All API sessions shall compulsorily be logged out every day.
In addition, retail traders will have the ability to update their mapped static IP addresses once in a week. When clients take multiple API keys, the broker will ensure non-registered algos are run only through predefined API keys.
“The circular is a game-changer for retail participants looking for algo trading, and is aimed at making it safer for retail investors,”said Harsha M, founder and CEO of Zerodha Streak. It will boost transparency and introduce strong security protocols – a win for responsible innovation, he added.
Algo trading provides significant advantages of timed and programmed order execution and higher liquidity. Institutional investors trade through algorithms using mechanisms such as direct market access (DMA) facility.
The Sebi’s February circular had cited an increasing demand for algo trading by retail investors. “In order to facilitate safer participation of retail investors, it has been decided to review and refine the existing regulatory framework to ensure proper checks and balances,” it had said.
Among other norms, the threshold order per second (TOPS) has initially been set at not exceeding 10. It may be adjusted by the stock exchanges after due notice to the market. If orders generated by clients are below the specified TOPS, they would not be required to register for algo trading from the broker’s system. They will be tagged ‘algo’ and a generic algo ID shall be provided by the exchange.
Algos developed by tech-savvy retail investors themselves shall also be registered with the exchange through their brokers if they cross TOPS, according to Sebi. The regulator said brokers will be solely responsible for handling grievances related to algo trading. In September 2022, brokers were prohibited from partnering with unauthorised algo trading platforms.
The NSE will have the authority to kill all rogue algos in case they affect the market. Brokers may charge retail investor an additional amount for providing API services.