Introduction

On 4th of February, 2025, the Securities and Exchange Board of India (“SEBI”) issued a circular (“Circular”) to update its framework on “Algorithmic Trading”.

Since 2012, SEBI has required algos deployed by the stockbrokers to be registered with the stock exchanges. After brokers started providing access to APIs, retail investors started deploying their own algos and third-party algo vendors (“Algo Provider”) started offering algos to retail investors. These algos deployed by the retail investor (or the Algo Provider) were not expressly required to be approved by stock exchanges. Additionally, brokers were unable to differentiate between an algo order and a non-algo order emanating from APIs, and lack of disclosure regarding the underlying logic used by an Algo Provider for certain algos raised “black box” issues.

Therefore, SEBI issued the Circular in an effort to protect retail investors and mitigate the concerns discussed above. This note summarises the changes brought forth by the Circular.

Changes introduced by the Circular 

Registration of algos developed by retail investors: The Circular requires retail investors to register algos developed by them with the stock exchange, if they cross a specified order per second threshold (this will be notified in due course). Other than the investor, only the investor’s spouse, dependent children and dependent parents can use the algo. The application for registration may be submitted through the brokers. 

Empanelment of Algo Providers: The Circular requires Algo Providers to be empanelled with the stock exchanges (the criteria and procedure for such empanelment will be specified in due course). Brokers are explicitly prohibited from dealing with an Algo Provider unless it is empanelled with the stock exchanges.

Arrangement between brokers and Algo Providers: Algo Providers will act as agents of the brokers and accordingly be subject to due diligence by such brokers. Brokers will also have to address complaints related to the Algo Providers. Interestingly, Algo Providers and brokers may share with each other the subscription charges and the brokerage collected from the investor, provided that such charges are prominently and completely disclosed to the investor. Stock exchanges will further define the roles and responsibilities of the Algo Provider and the brokers in due course.

Detection of algo orders: Brokers are required to put in place systems and procedures in place to detect, identify and categorise all orders above a threshold (to be specified in due course) as “algo orders”, and will be subject to inspections from stock exchanges to ensure compliance in this regard. Additionally, the Circular requires access to APIs to be authenticated through two factor authentication, based on “Open Authentication” mechanism. SEBI has also prohibited open APIs and required brokers to assign a unique vendor-client specific API key and whitelist static IP, to identify and trace the Algo Provider and the investor.

Registration for black box algos: Notably, SEBI has categorised algos into two types: 

Recognising the risks associated with black box algos, SEBI requires black box Algo Providers to register as research analysts with SEBI. To ensure that the logic underlying black box algos is supported by adequate research and analysis, SEBI requires each black box Algo Provider to maintain a detailed research report for each black box algo and confirm to the stock exchanges that it has maintained such report. In case the logic underlying black box algo changes, the Algo Provider must obtain a fresh registration from the stock exchanges for such algo and comply with the foregoing.

Timelines

The requirements under the Circular will come into effect on August 01, 2025. The Broker’s Industry Standards Forum will prescribe the relevant norms and standards in consultation with SEBI and stock   exchanges by April 01, 2025.

The turnaround times for registration of algos will be specified by the stock exchanges. White box algos will be registered on a fast-track basis by stock exchanges and other algos will be registered on a regular basis.

Conclusion

SEBI has extended its regulatory oversight to all Algo Providers by mandating Algo Providers to empanel with stock exchanges and requiring stockbrokers to treat Algo Providers as outsourced service providers. As in the case of outsourcing arrangements, contracts between a broker and an Algo Provider will have to be carefully crafted amidst other aspects to ensure compliance by August 01, 2025. 

Additionally, while requiring black box Algo Providers to register as research analysts is a step towards addressing concerns over transparency and accountability, clarification is needed on whether client-level segregation as applicable to research analysts would extend to black box Algo Providers as well, and whether it would restrict their ability to enter into brokerage fee-sharing arrangements with brokers. We anticipate that the upcoming FAQs under the Circular will address these nuances.