Sebi publishes guidelines for stockbrokers providing algorithmic trading services

Capital markets regulator Sebi on Friday issued guidelines for securities brokers, who provide algorithmic trading-related services to investors, to avoid cases of mis-selling.

The guidelines came after the Securities and Exchange Board of India (Sebi) observed that some stockbrokers are providing algorithmic trading facilities to investors through unregulated platforms.

Unregulated platforms offer algorithmic trading services or strategies to investors for automated trade execution. These services and strategies are marketed with “claims” of high returns on investment, Sebi said in a circular.

Additionally, “ratings” have been assigned to the strategies, which could lead investors to be drawn to such claims. This may amount to mis-selling these services and strategies to investors, he added.

Accordingly, Sebi has assigned certain responsibilities to stockbrokers who provide algorithmic trading facilities to investors through these platforms.

These stockbrokers were barred from making any reference to the past or expected future performance of the algorithm as well as from associating with any platform that provides any reference to the past or expected future performance of the algorithm, said Sebi.

“Security brokers who directly/indirectly refer to any past or future expected return/performance of an algorithm or who are associated with a platform providing such a reference, should remove such reference from their website and/or or dissociate from platforms providing such referrals, as the case may be, within seven days,” he added.

The framework, applicable with immediate effect, aims to prevent such acts and instances of mis-selling.

Earlier in June, the market regulator warned investors against dealing with such unregulated platforms offering algorithmic trading services and strategies.

Algorithmic trading or “algo” in market parlance refers to orders generated at lightning-fast speed through the use of advanced mathematical models that involve automated trade execution, and it is primarily used by large institutional investors. .

Published on

September 02, 2022

Dolores W. Simon