By Nesil Staney
The National Stock Exchange (NSE) has issued guidelines for retail participation in algo trading after a nudge from the market regulator. Nesil Staney explains how these will ensure better oversight while allowing programmed order execution for retail participants & increased liquidity in the markets
Why have retail investors been given access to algo trading?
The Securities and Exchange Board of India (SEBI) cited an increasing demand for algo trading by retail investors for giving the said permission. However, in order to facilitate safer participation of retail investors, it was decided to review and refine the existing regulatory framework to ensure proper checks and balances. It said that brokers will be solely responsible for handling grievances related to algo trading. Institutional investors trade through algorithms using Direct Market Access. The NSE norms for safer participation of retail investors follow a February 4, 2025, circular from SEBI which mandated that algo-trading providers register with stock exchanges and outlined rules for using application programming interfaces (APIs). The new rules, effective from August 1, 2025, were initially set for implement-ation on April 1 but were postponed to give the stock exchanges time to finalise the standards. The NSE is the first exchange to finalise the guidelines, with the BSE yet to do so.
How will the trades by retail investors be executed?
Stockbrokers will provide retail investors with API access to their trading systems. Retail clients must provide the broker with a static IP address. It will be mapped to the 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 who belong to the same family. It is mandatory for API access for client generated algorithmic trades and for such trades generated by brokers. All API sessions shall be compulsorily logged out of every day before the next trading day. Retail traders will have the ability to update their mapped static IP addresses, not more than once a week. When clients have taken multiple API keys, the broker will ensure non-registered algos are run only through one predefined API keys.
Threshold for retail orders
The NSE has set the threshold order per second (TOPS) at 10, though it can be tweaked after due notice. If the orders generated by clients are below this, they will not have 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 NSE. Algos developed by tech-savvy retail investors shall also be registered with the exchange through their broker if they cross TOPS. In September 2022, brokers had been prohibited from partnering with unauthorised algo trading platforms.
Likely impact
Since static IP has been made mandatory for all types of algo access, better surveillance can be expected as it boosts traceability and accountability. With the TOPS set at 10 orders per second, it may curb hyperscaled high-frequency trading strategies, at least initially.The exemption for less than 10 orders per second also means that low-frequency players do not need to register algos, thus giving them more freedom. As brokers need to register algos, this will ensure better oversight though it may slow down innovation unless the registration process is streamlined.
Institutional algo trading firms
Goldman Sachs, Morgan Stanley, QuadEye Securities, Graviton Research Capital, World Quant LLC, iRage, Alphagrep Securities, Jane Street, Hudson River Trading, Tower Research Capital, Citadel Securities are the big institutional investors engaged in algo trading. There are different types of institutional algo traders. High Frequency Traders (HFT) are those who execute large number of trades in ultra high speeds. Then there are proprietary trading firms who focus on risk adjusted returns through proprietary trading models and strategies in multiple asset classes. Market makers who provide liquidity by continuously buying and selling, capturing the spread between bid and ask prices, are the third set. Finally, there are the quantitative hedge funds which employ mathematicians to use highly advanced statistical models.
Pros & cons of algo trades
Human errors such as wrong inputs and emotionally-driven decisions are eliminated in algo trading resulting in higher profits otherwise not achievable. Algorithmic trades currently account for 43% of Indian stock market turnover. The global average is 75% in equity markets. In the US, 90% of equity market turnover emerge from computer programmed trades. High frequency traders account for as much as 50% of the net trades executed in the US markets. They capitalise on small price differentials using powerful computer generated codes. This has contributed significantly to market volatility — a huge concern in stock markets globally. They are also highly active in commodities and currency markets. Regulators globally are weighing the risk (volatility) versus the return (liquidity) of such ultra-fast computer traders.