Is Algo Trading legally approved?

In the past few years, India's economy has seen a big change, with algo trading taking the spotlight. But amidst all its speed and complexity, there's one important question: Is algo trading allowed in India? Let's delve into the legal side of algo trading in India and understand the regulations surrounding it.

What does SEBI tell about Algo trading?

It does not ban algorithmic trading. However, certain regulations must be implemented, according to SEBI.

The proposed regulations by SEBI are a positive step in ensuring the safety and security of retail investors who choose to engage in algo trading. All unregulated platforms must obtain SEBI’s approval to offer automated trading strategies in India.

The Securities and Exchange Board of India put these rules in place back in 2012, called the “Framework for Algorithmic Trading and Co-location.“

SEBI’s measures for safe trading

All algo trading firms must undergo a half-yearly audit selected by SEBI. Market participants who engage in algo trading must establish a strong risk management system, which includes pre-trade risk checks, post-trade surveillance, and real-time monitoring of trading activities.

However, SEBI warns brokers against unregulated Algo platforms. SEBI stated that any broker offering algo trading solutions under an arrangement with unregulated platforms that claim high returns in the past or expected profit in the future should stop such an association. It is also said that brokers offering such trading facilities should not claim any profit based on an algorithmic process.

Can only big investors use Algo trading?

In the beginning, only big shots like bank investment firms could use it, but by 2016 even regular folks like us could join in.

Anyone who has some trading experience and knows how to code a trading idea can create and use algorithmic trading. We can say that a trader, a data scientist, or even a student with basic knowledge can use algo trading.

Algorithmic trading is used in many aspects of trading and is not just limited to automating your buy and sell orders. You can use them to generate trading signals, forecast market movement, manage risks, risk management and much more.

Nothing is stopping retail traders from using trading algorithms. SEBI just wants us to be smart about it. They are all about managing risk, especially making sure we don’t get burned by unexpected market swings or paying more than we planned for a trade. So algo trading is legit for everyone in India, whether you are a big player or just dipping your toes in the market.

Basic requirements to use Algo Trading

Institutional investors enjoy more latitude in developing and employing their algorithms, typically leveraging specialized software for this purpose. Conversely, retail investors often rely on pre-packaged algorithms provided by brokerage firms. However, these pre-built solutions may not accommodate intricate trading strategies and may have certain limitations. SEBI has established several regulatory measures concerning algo trading in India. Firstly, any platform offering automated trading strategies must obtain approval from SEBI. Additionally, SEBI prohibits unregulated platforms or entities from making claims regarding past profits or expected returns from their algorithms. Furthermore, all algo trading firms are mandated to undergo a biannual audit, exclusively conducted by auditors selected by SEBI. Moreover, SEBI stipulates stringent risk management protocols for market participants engaged in algo trading. This entails the establishment of robust risk management systems encompassing pre-trade risk assessments, post-trade surveillance, and real-time monitoring of trading activities.

Algo trading makes trading efficient for India.

As technology continues to evolve and the financial markets in India face new complexities, algo trading is expected to play an increasingly significant role in shaping the landscape. The efficiency and speed provided by algo trading are likely to become even more crucial factors in navigating India's financial markets. By staying informed about regulations, selecting reputable platforms, and conducting thorough research, individuals can effectively navigate the realm of algo trading and enhance their trading experiences. Looking ahead, the future of algorithmic trading in India appears promising, presenting enticing prospects for both individual investors and institutional participants.