SEBI Releases Framework for Safe Retail Participation in Algorithmic Trading

Current Context: On 4th February 2025, The Securities and Exchange Board of India (SEBI) has released a new regulatory framework to ensure the safe participation of retail investors in algorithmic trading through brokers.

• This framework, which will take effect from August 1, 2025, includes several key measures:
• Broker Responsibility: Brokers must obtain stock exchange approval for each algorithm before offering it to retail investors.
• Unique Identifiers: All algorithmic orders must be tagged with a unique identifier provided by the exchange to ensure an audit trail.
• Security Measures: Enhanced security measures, including OAuth-based authentication and two-factor authentication, are required to prevent unauthorized access.
• Algorithm Categorization: Algorithms are categorized into "white-box" (transparent logic) and "black-box" (undisclosed logic), with additional scrutiny for black-box algos.

Question:

1 What is the key requirement for brokers before offering algorithmic trading to retail investors?

• A) Brokers must obtain approval from SEBI for each algorithm
• B) Brokers must obtain approval from stock exchanges for each algorithm
• C) Brokers must register their algorithms with RBI
• D) Brokers can offer any algorithm without prior approval

Answer: B) SEBI's framework mandates that brokers must obtain stock exchange approval for each algorithm before offering it to retail investors, ensuring greater oversight and compliance.