Algo trading: Here's what Zerodha's Nitin Kamath said about Sebi's paper 

Market regulator Securities and Exchange Board of India (Sebi) on December 13 published a consultation paper on algo trading for retail investors.

Sebi proposed empanelment and registration of algo providers with exchanges. The regulator also called for asking tech-savvy retail investors to register the algos they have developed with the exchanges through their brokers.

Under the new framework, algorithmic trading by retail investors will be governed for ease of use with proper checks and balances. The draft circular proposing new rules will remain open for public feedback until January 3, 2025. 

Now, Nithin Kamath, CEO of Zerodha has commented on Sebi's proposed norms for retail investors in Algo trading. 

In a post on social platform X, Kamatah said, "My understanding of it is it should be ok for savvy traders using Application Programming Interfaces (APIs) for individual trading with some reasonable order limits. But the APIs have to be accessed through only static IPs, but this isn’t hard to get. But platforms that offer algos or readymade strategies will need to get them approved through the broker. The broker, in turn, has to register all algos and strategies with the exchanges."

"The broker also has to ensure that customers are following the same strategies that were registered. That means brokers will have to build and offer the infrastructure for people to run their algos and ensure compliance," said Kamath.

According to SEBI, stock brokers can only offer algorithmic trading services after obtaining the necessary approval from the stock exchange for each algorithm. 

“All algorithmic orders must be tagged with a unique identifier from the stock exchange to create an audit trail. Brokers must also seek exchange approval for any modifications or changes to approved algorithms or systems,” the circular states. 

Regarding APIs, SEBI specified that brokers will be the primary party, while any algorithm provider, fintech firm, or vendor will act as their agent when using the broker's API. 

Algorithmic trading involves using computer programs to execute trades based on pre-defined criteria such as price, time, and volume. While historically restricted to institutional investors, this proposed framework would allow retail investors to access approved algorithms through brokers, giving them tools previously available only to larger market players.