SEBI's green signal to the two models for API regulation

Dharmik Thakkar, a well-known algorithmic trader and strategy provider, had a discussion with SEBI's senior management concerning algo trading and the consideration of two models to regulate the same.

The meeting, presided over by SEBI's Chairperson Madhabi Puri Buch, brought together representatives from market infrastructure institutions (MIIs), algorithm providers, and stockbrokers to address various concerns surrounding algorithmic trading. Thakkar mentioned that SEBI is aiming to speed up the process and expects to release a circular on this matter by the end of March.

OPEN API PLATFORMS

An application programming interface that provides developers with access to a software application that is available to all

Algo trading happening today is mainly on open API platforms, and it is something to think about. This allows you to execute a trade without a mobile app or a trading platform.

Brokers have been asked to stop giving access to the open API if they do not know where it is being used. Currently, there are a number of strategies used by clients using an open API that are neither tracked by brokers nor approved by exchanges.

TWO MODELS CONSIDERED BY SEBI TO REGULATE

• The first model requires stock brokers to secure approval for their algo platforms and other trading platforms and take full responsibility for their algos, including cybersecurity and data security aspects.

• The second model proposes that algo platforms be regulated, allowing strategy providers to either share their exact strategies executed via APIs or their past performance, provided it has been verified by a PVA.

These given models work as a strong tool to oversee and regulate algo trading as a whole. By ensuring that brokers are fully aware of where and how their APIs are being used, SEBI aims to curb unauthorized or potentially harmful trading activities.

There's concern about some trading happening on open API platforms.

Traders can execute trades without using a mobile app or trading platform.

They can create strategies that the broker doesn’t know about, which could cause problems if these algos trigger incorrectly and affect the market price.

SEBI’S direction

The NSE (National Stock Exchange) will establish a team to act as PVAs, and a group has been created to propose criteria for evaluating algo strategy providers under the direction of SEBI. Algo providers won't be able to show back test results or past results where all algorithms used in performance were not verified by PVA.

SEBI is proposing some serious rules for algorithmic trading, where all algorithms used in trading must be approved by the exchange.. This means that any strategy, whether used by a broker or a client, needs to be certified. Basically, SEBI wants exchanges to set up a system ensuring that all approved algos with unique IDs are used.