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Context:

SEBI has introduced a framework to allow safer participation of retail investors in algorithmic trading.

About Algorithmic Trading

Algorithmic trading, or algo trading, leverages advanced computer programs to automatically execute trades based on mathematical and statistical models. This approach improves speed, efficiency, and objectivity in trading while requiring significant technical infrastructure and careful risk management.

New Initiative by SEBI

The Securities and Exchange Board of India (SEBI) allowed retail investors to participate in algorithmic trading (commonly known as algo trading). Previously, this advanced trading technology was accessible only to institutional investors, such as foreign funds and proprietary traders.

By opening up algo trading to retail investors, SEBI aims to democratize access to the benefits of automated trading—such as faster order execution, improved liquidity, and reduced transaction costs—while ensuring robust safety measures are in place to protect individual investors.

Key Features of the New Framework

Retail investors can now use approved algorithms, but only through registered brokers.

Every algorithm must receive prior approval from stock exchanges before it can be deployed.  

All orders generated by algorithms will be tagged with a unique identifier to create a clear audit trail, allowing exchanges and regulators to monitor and trace trades accurately.

Brokers must seek approval from exchanges for any modifications to the approved algorithms.

A “kill switch” mechanism has been introduced, which allows exchanges to immediately halt algorithm-generated orders if any irregular or manipulative behavior is detected.

Retail investors who develop their own algorithms (beyond a specified threshold of orders per second) must register them through their brokers.  

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Source: 

ECONOMIC TIMES