In February 2025, SEBI (Securities and Exchange Board of India) issued a circular on “safer participation of retail investors in algorithmic trading.” The circular introduced measures to strengthen controls around algorithmic trading, primarily focused on retail clients. The growing demand from retail investors for algo trading prompted SEBI to review and revisit the regulatory framework governing stock brokers and stock exchanges.

The initiative aims to clearly define the rights and responsibilities of key stakeholders in the trading ecosystem, ensuring that retail investors can access algo trading facilities with the necessary safeguards in place. Ahead of its implementation, all stakeholders must know the impact on them.

Key Changes in Algo Trading by SEBI 

In a significant move to streamline API-based algorithmic trading, SEBI has issued a circular outlining new guidelines, effective August 1, 2025. Here's a snapshot of the key changes that have been put in place by exchanges in regulations (soon) to safeguard and empower retail investors:

To begin with, let’s understand the categorisation of algos. 

  1. White Box Algos: These are also known as execution algos. In these, the logic is known and replicable. As an example, a slicer algo to slice a large order quantity into smaller time-based intervals to achieve better automated execution.
  1. Black Box Algos: In these, the logic is not disclosed to the user, and these are not replicable. For this category, algo providers must register as ‘Research Analysts’ and maintain their detailed research and trading thesis reports.

1. API Orders as Algos

  • When using broker APIs tagged with unique identifiers from the stock exchange, brokers must act as principals. 
  • Only the empanelled algo providers will function as agents. This means that all retail algo vendors who are not empanelled by the exchange and whose algorithmic strategies are not approved by the exchange will no longer be able to offer their services to the Indian retail segment.
  • Also, all algo orders originating through broker-provided APIs must be tagged with unique identifiers called ‘algo IDS’ to the stock exchange. This will help in auditing and tracking these as needed. 
  • For orders placed via APIs, if the number of orders per second (to be defined shortly by the exchanges) exceeds a specified threshold, the order will be classified as an algo order and will require an algo ID.

2. Retail Algo Developers

Tech-savvy retail investors or traders who prefer creating their own algos must register their algos through their brokers with the exchange and obtain approvals. These registered algos may be used within the investor’s family (self, spouse, dependent children/parents) and not anyone else. 

3. API Access Controls for Brokers

  • Brokers must implement systems to detect and categorise algos crossing the specified order per second threshold (OPS). 
  • Open APIs are disallowed. Only client-specific API keys and static IPs whitelisted by brokers will be permitted.
  • OAuth-based authentication and two-factor authentication are mandatory. This will prevent unauthorised API-based algo trading. 
  • Brokers are accountable for all algo-related investor grievances. They must pay attention to all such issues and resolve them. 

4. Approval and Monitoring of Algos

  • Brokers must obtain exchange approval before offering any algo to clients.
  • All algo orders must be tagged with a unique exchange-provided ID. This will help in auditing and tracking these. 
  • Any changes to approved algos require fresh approvals. 

5. Empanelment of Algo Providers / Vendors

  • All algo providers must be empanelled with stock exchanges. The exchanges must set the criteria for the empanelment of algo providers. This means only exchange-empanelled algo providers can be onboarded to provide services to retail investors. 
  • Before onboarding any algo provider, the broker must do their own due diligence. 

6. Stock Exchanges’ Oversight Role

The main role of stock exchanges will be more supervisory. Exchanges will supervise algo trading, ensure simulation testing, and have the authority to kill specific algos if needed. They will define SOPs for testing algos, monitor data flows, and set timelines for fast-track and standard algo approvals.

Stakeholders Impacted by SEBI’s Changes

1. Retail Investors

SEBI’s revamped framework prioritises investor protection and enables algo trading for them. Stricter compliance and registration norms aim to make algo trading safer and more transparent for tech-savvy retail traders, encouraging responsible participation.

2. Brokers

With expanded responsibilities, brokers now play a central role in the algo ecosystem—from approving and monitoring algos to ensuring secure API access and addressing investor grievances. Compliance is now not just expected, but enforced.

3. Algo Providers

Algo providers must align with the new norms to stay relevant. Empanelment with exchanges, maintaining transparency, and ensuring clean data practices are no longer optional—they’re essential for continued operations.

4. Stock Exchanges

Tasked with implementing SEBI’s directives, exchanges now take the lead in monitoring algo activity, setting empanelment criteria, and enforcing compliance through robust SOPs, surveillance, and approval mechanisms.

Implementation Timeline

Regarding the implementation timeline, SEBI initially stated that the changes should be finalised by early May 2025 (revised timeline).

The Way Forward

SEBI’s new guidelines mark a pivotal shift in India’s algorithmic trading landscape. By introducing tighter controls, clearer responsibilities, and a structured regulatory framework, SEBI aims to foster a more secure, transparent, and inclusive environment for retail investors. As the August 1, 2025, deadline approaches, all stakeholders—brokers, exchanges, and algo providers—must gear up for a regulated tech-driven algo trading ecosystem.