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Algorithmic trading, often referred to as algo trading, involves the use of computer programs to automate trading decisions in financial markets. These algorithms execute pre-programmed instructions related to price, volume, timing, or other market conditions. In India, the rapid adoption of such technology prompted the Securities and Exchange Board of India (SEBI) to introduce specific guidelines to maintain orderly markets and protect investors. These regulations are essential to prevent misuse, ensure fair access, and minimise risks such as market manipulation or systemic failures.
This article explores the key SEBI regulations governing algorithmic trading, the reasons behind these rules, and their implications for traders and brokers in India.
Algorithmic trading refers to the use of automated software systems that follow defined strategies to place orders at high speed. These can include:
High-frequency trading (HFT)
Market making algorithms
Arbitrage strategies
Smart order routing
Statistical and technical models
The key advantage of algo trading lies in its speed and accuracy. However, without regulation, it can lead to unfair advantages for select participants and potentially destabilise the market.
SEBI introduced regulations to ensure that the benefits of technological advancement in trading do not compromise fairness and investor protection. Some primary concerns include:
Market fairness: Preventing a technological advantage from creating an uneven playing field
Risk management: Avoiding technical glitches that could lead to flash crashes or systemic disruptions
Manipulative practices: Detecting and eliminating strategies that mislead market participants through spoofing or layering
Over time, SEBI has issued various circulars to establish a clear regulatory framework for algo trading. Below are the main components:
Brokers and trading members must seek approval from exchanges before deploying any algorithm. Each strategy needs to be tested and documented, including its logic, risk parameters, and expected outcomes.
Trading members must use infrastructure certified by stock exchanges, including servers, co-location facilities, and connectivity tools. Exchanges monitor and audit the systems regularly for compliance and performance.
SEBI mandates a series of risk control mechanisms that must be built into algorithmic systems. These include:
Price and quantity limits
Order value checks
Fat-finger error prevention
Order throttling (order-to-trade ratio limits)
Circuit breakers and kill switches
Such controls are designed to minimise potential disruptions caused by faulty algorithms or operator errors.
Co-location facilities — where traders place servers close to the exchange for faster execution — must be accessed fairly. SEBI ensures that all participants get equal access, and no unfair latency advantage is granted.
Each algorithm must carry a unique identifier. Exchanges track these IDs for all orders placed, allowing authorities to audit activities in case of unusual trading patterns or complaints.
SEBI regulates the maximum permissible OTR to prevent traders from flooding the market with unexecuted orders. Excessive cancellation of orders is considered disruptive and may attract penalties.
Brokers using algorithmic trading must undergo periodic audits by certified professionals. Detailed logs, strategy documentation, and system architecture must be maintained for review.
The implementation of these regulations has helped streamline and legitimise algo trading in India. Some of the visible effects include:
Level playing field: Equal opportunity for all participants, including retail investors
System integrity: Reduced chances of market disruption due to rogue algorithms
Accountability: Easier identification and investigation of irregular trading activity
Retail traders in India historically had limited access to algorithmic tools due to regulatory and infrastructure barriers. In February 2025, SEBI introduced a framework to enable safer participation, requiring brokers to take full responsibility for third-party algos offered on their platforms.
Every algorithm must receive prior exchange approval, and all algo-generated orders must carry an exchange-assigned unique identifier for tracking. Brokers are also required to maintain logs, follow standardised API protocols, and ensure cybersecurity, thereby expanding access while preventing misuse of unregulated strategies.
SEBI continues to evolve its stance as technology in trading advances. Some challenges it seeks to address include:
Grey areas in third-party algo offerings to retail users
Cybersecurity risks from API-based integrations
AI/ML-based trading strategies that evolve dynamically
Maintaining transparency while encouraging innovation
As India moves toward increased retail participation and digitisation, the role of regulated and responsible algorithmic trading is set to grow.
SEBI’s regulatory framework for algorithmic trading plays a vital role in maintaining fairness, transparency, and security in India’s financial markets. While algorithmic trading brings efficiency and innovation, it must be balanced with adequate checks to prevent misuse and maintain investor trust. Traders and brokers looking to operate in this space must ensure strict adherence to SEBI’s evolving guidelines.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Algorithmic trading is legal in India, provided it is carried out in accordance with the regulations and guidelines issued by the Securities and Exchange Board of India (SEBI).
Yes. Since February 2025, SEBI allows retail investors to use algorithmic trading through brokers. Brokers must obtain exchange approval for each algo, tag orders with exchange-assigned identifiers, and follow strict API, logging, and cybersecurity norms to ensure safe participation.
The order-to-trade ratio limit is designed to prevent traders from flooding the system with excessive unexecuted orders, thereby maintaining market efficiency and ensuring fair trading practices.
Co-location services are permitted in India, but they must be provided in a fair and transparent manner so that all trading members have equal opportunity to access them.
An individual trader does not require direct SEBI approval to use an algorithmic trading strategy, but the broker or trading member deploying the algorithm must obtain prior approval from the exchange.
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Posted on 19 Dec
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